Cash: What to do with it now
With money fund yields hovering around .05% your mattress is probably looking like a pretty good storage place for your cash. Take heart, even in these low interest times it pays to have a plan. Here are some considerations.
Keep some liquid cash investments
Although you won’t get much yield income from bank savings and checking accounts or money market funds, you still need a store of ready cash to pay current and ongoing living expenses. If you are conservative, a six month reserve of living expenses should do the trick.
Create a Certificate of Deposit ladder
For your remaining cash, consider creating a ladder of Certificate of Deposit (CD) investments. The term laddering simply means staggering the maturity dates of the CDs you purchase so you have a constant flow of future cash.
For example, your first CD purchase could have a 90-day maturity and pay .5%. Next month you might purchase a 12-month CD with an annual percentage yield of 1%. The following month you buy a 24-month CD paying 2.5%. You get the idea.
Over time, you select maturity dates that will provide a stream of cash on some regular basis such as monthly, quarterly, annually, etc.
Cost averaging your CD ladder
By utilizing the laddering concept, you will create a cost-averaging program, much as I have suggested for the purchase of stocks and bonds. In the case of CDs, a systematic maturing of deposits will allow you to stay current with market interest rates for your future ladder investments.
If your first 12-month CD paying 1% matures in December, and current one-year rates have risen to 1.5%, you can renew on a 12-month basis and gain the .5% advantage. Conversely, if the one-year rates have dropped to .75%, you have the flexibility to look at 18-month CDs, or possibly 24-month CDs to provide the 1% rate of return previously earned by the shorter maturity.
By having constantly maturing laddered CDs you will have a regular opportunity to hunt for higher yields while you wait for better investments for your cash.
It’s all about safety and liquidity
The main reasons anyone should accept today’s miserable interest rates are safety of principal and liquidity. Money market funds are liquid, and relatively safe, but they are not insured by the US government’s Federal Deposit Insurance Corporation (FDIC), and their interest rates are practically nil. Money market account funds are a great place for the cash you will need tomorrow, or next week.
Most CDs are insured by the FDIC, and they pay higher interest – but they are not as liquid, and usually have substantial early withdrawal penalties. Do not create a CD ladder with cash you know you will need before the maturity date of the CD purchased. Put that money in a savings, checking, or money market account.
Thinking that the fed guarantee of CDs isn’t worth what it once was? You are probably right, but it’s pretty safe to say that the fed will always be the last man standing in a BIG financial meltdown.
Shopping for Certificates of Deposit
If the CD you purchase is FDIC insured, it doesn’t really matter where you buy it. Yes, if the bank you buy it from folds, it may take a little time to get your money, but you will get your money as long as there is an Uncle Sam. If you are not comfortable with the possibility of a failing bank, stay with institutions that have a higher rating on BankRate.com, and Money-Rates.com.
Shop around for the best interest rates for your CDs. Many brick and mortar banks run CD specials, as do internet banks. You don’t need to buy CDs “in town”. We live in a global economy, and the internet is a vast resource of varied rates for CD purchases. Check out sites like BankRate.com, and Money-Rates.com to see who is offering what yields. These websites provide local and national interest rate information, and guides to help you navigate the buying process. Get the most for your money – every little bit helps.
There is also a new breed of no-penalty CDs, which allow you to take your money out if you need it. Nice idea, but the interest rates are usually considerably lower. However, not a bad choice if you are just getting started with CD investments, or expect CD rates to start climbing soon.
There are always trade-offs when purchasing cash instruments. Doing a little research can substantially boost your income.
Before you act on any financial advice that you read here or elsewhere, be sure to seek the counsel of your financial, and/or tax adviser. There are many roads to financial prosperity, get to know all your options
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Cash: What to do with it now
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