What Can I Do with My Excess Cash?

If you are fortunate to have extra “discretionary” cash on hand and are unsure what to do, consider the following.

Review your overall finances to take care of basic financial needs:

Set aside cash for an emergency fund (at least six months of living expenses).
Pay down, or pay off, outstanding debt, especially high interest credit cards.
Consider making extra payments toward student loans, auto loans and even your mortgage, depending on the interest rate on the debt.
Review your retirement plan contributions to determine if you can contribute more to your (or a spousal) IRA account or retirement plan this current tax year.

Think about your financial goals:

What is the purpose of your savings? For a primary or vacation home? A wedding or bar/bat mitzvah? College expenses? A big trip?
Are you on track for your retirement savings?
When will you need this cash?

Short term (within 1 year)?
Near term (1 to 5 years)?
In the future (5 years or more from now)?

Think about how much risk you are willing to take. If you need cash in the next one to two years and do not want to risk losing principal, your choices are quite different that investing in the equity or bond markets (which carry a higher risk of losing principal). Of course, lower risk and risk-free investments usually earn lower returns.

Consider the liquidity of your cash needs:

How quickly can you access funds if/when you need the cash?
Are there any tax or early withdrawal penalties?
Is your cash insured?

The FDIC (Federal Deposit Insurance Corporation for banks) or the NCUA (National Credit Union Administration for credit unions) will insure up to $250K per depositor. If you have more than $250K, open another account at a different financial institution to be 100% safe. Both FDIC insurance and NCUA insurance are backed by the full faith and credit of the U.S. Government.

High Interest Savings Accounts

Perhaps the easiest way to get higher interest is through high interest online savings accounts. Bankrate.com provides updates about the best high interest savings accounts:

https://www.bankrate.com/banking/savings/best-high-yield-interests-savings-accounts/

Certificates of Deposit (CDs)

CD (Certificates of Deposit) rates are often best at online banks. You can create a CD ladder with different maturities if you wish.

I-Bonds

Each person may invest $10,000 per year in an I-Bond issued by the US Treasury. Interest is earned on the bond every month. The interest is compounded semiannually. Twice a year, the interest the bond earned in the previous six months is added to the bond's principal value; then, interest for the next six months is calculated using this adjusted principal.

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm

Treasury Bills

Purchase short term T-bills (maturity less than 1 year). T-Bills have been earning over 4% annualized the past year. You can purchase them directly through the Treasury Direct website or through various custodians including Fidelity, Schwab, and TD Ameritrade.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA

Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.