Where are the best places to invest my cash?

As interest rates have risen over the past two years, holding cash has suddenly become a lot more rewarding. Or has it?

As I begin writing any blog article it always begins with a web search to see what others have written about a topic. I am always curious how my ideas match up (or not) to others. And sometimes I am surprised by what ads are presented to me in those searches. According to my search engine, I should be considering investing in cryptocurrencies and stocks. That may be fine for some investors but not for most who are just seeking more income from safe investments.

If you are like many investors that have built up a lot of cash, you may be wondering where the best places are to invest.

Before you start investing your cash, consider your personal needs first:

1. Do I have enough cash set aside for an emergency—a minimum of three to six months of expenses.

2. Do I have outstanding loans or debt at high rates? Usually, these should be paid off first.

3. Have I maxed out contributions to my 401(k) or 403(b) at work and IRAs? It is hard to save too much for retirement.

4. Do I have other pressing short-term needs for cash? Buying or renovating a house? Making big family gifts? Set aside this money first.

Once your needs have been addressed, then you can take up the question about what to do with your excess cash.

Cash typically includes money in a checking or savings account, certificates of deposit, short-term US Treasury securities such as T-bills and money market funds. These are all relatively stable investments and highly liquid. This is especially important for your Emergency Fund as emergencies require immediate and unrestricted access to cash. If you have to wait more than a few days to access your emergency fund, it may not be the most appropriate investment.

I want yield and no risk

For low-risk investors who do not want to see their principal value fluctuate, these investments are now paying higher yields. We like high yield savings accounts issued by major, well-known financial institutions. Most of the major credit card companies offer high yield savings accounts. You access your account online, but a few have local “bricks and mortar” offices for an in-

person visit. Importantly, they are insured up to $250,000 by the FDIC or NCUA, agencies that are backed by the US government.

With the explosion of fin-tech companies such as PayPal, SoFi, Venmo, Stripe, Chime, and others, consumers now have many more financial choices at their fingertips. While these apps are super convenient, most deposits are not insured. So what? Remember Silicon Valley Bank and First Republic Bank? Fortunately, these banks were insured by the FDIC which meant that depositors did not lose their money when the banks got into financial trouble. Fin-tech companies are not banks and only a few are just starting to offer FDIC-insured accounts to savers. Buyer beware.

High yield savings accounts from major financial institutions are currently yielding between 4-4.5% as of 7/1/2024.

I can tie my money up for a little while

Certificates of deposit, EE- and I-bonds, and short-term US Treasury securities are good options. CDs can be purchased in a range of maturities from 1 month to 5 years. But if you have to redeem funds early, banks impose an interest penalty of 3 to as much as 12 months’ interest. Read the find print. Yields range from 4.5-5.5% as of 7/1/24 depending on maturity.

I-bonds received a lot of attention about a year ago when the current yield surpassed 9%. However, this rate is reset every six months. Today, the yield on I-bonds is 4.28% as of 7/1/24. In addition, the maximum purchase amount is $10,000. With high yield savings accounts yielding about the same, I-bonds no longer have an advantage as high yield savings accounts have no early withdrawal penalty or purchase limits.

US Treasury securities can be purchased directly from the government at TreasuryDirect.gov or through a brokerage account. Maturities range from 1 month to 30 years. One additional advantage of Treasuries is that if you live in a state with income tax such as Massachusetts, the income is exempt from state income tax. Unlike CDs, Treasuries bought through TreasuryDirect cannot be redeemed early.¹ If you need to sell your Treasury before maturity, there is a risk that you may not receive the full face value of the bond. Currently, yields range from 4.25-5.25% depending on maturity.

The cash trap

Yields have increased so much in the past 24 months that many investors feel that they are winning by holding a lot of cash. However, higher yields on cash may be a distraction for long

term investors. Keep in mind that during the trailing 2 years, the S&P 500 index has risen about 40% in cumulative terms as of 6/29/24. This is why a diversified approach is so important to earning the best returns over the long term.

So, if you have too much money in cash and you have met all of your Emergency Fund and short-term needs, you may want to contact your adviser to consider reallocating it towards long term investments such as stocks and bonds. As with any allocation decision, your particular circumstances, including risk tolerance and time horizon, will dictate whether this is an appropriate strategy or not.

Not sure what to do? Give me a call. I’m happy to review your situation and determine the best approach given your circumstances. You can schedule a quick call with me by clicking HERE.

Lyman H. Jackson

Lyman@PlanWithFPS.com

617-653-3303

Click HERE to receive our award-winning newsletter. We never share your info and you can unsubscribe at any time. Check out our other blogs at www.PlanWithFPS.com/blog

· What can I do with my excess cash? https://planwithfps.com/blog/what-can-i-do-with-my-excess-cash

· How to avoid a Jack-in-the-Box surprise at retirement https://planwithfps.com/blog/how-to-avoid-a-jack-in-the-box-surprise-at-retirement

· Market volatility, cash and tech stocks https://planwithfps.com/blog/market-volatility-cash-and-tech-stocks

¹ If transferred to a brokerage account, Treasuries can be redeemed before maturity at current market rates which could mean that you lose money on your investment.

©2024 by Financial Planning Solutions, LLC (FPS), a Registered Investment Advisor. Reprinting or redistribution only by permission. 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 after entering into an advisory relationship. Information herein includes opinions and forward-looking statements that may not come to pass. Information is derived from sources believed to be reliable. Information is at a point in time and subject to change without notice. Such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.