6 Places to Stash Your Cash
Building Financial Reserves
The key to building financial resilience and long term wealth is to save a portion of your current earnings for the future. By actively managing expenses and living within your means you can save for a rainy day, for something on your bucket list or simply to have more financial freedom. In this post we will share 6 places to save your money. Before we do that, let’s review a few important items.
The riskiest place for you to save your money is at home. Your valuables, such as jewelry, art and collections can be stolen or destroyed in a fire or flood, but insurance policies can help you replace or repair most of them. Cash, on the other hand, is limited in most renter’s or homeowner’s policies to $200!
Another risk that you take when you keep money at home or in a checking account, is inflation risk. While your money sits idle, the cost of everything from rent to groceries to health care services continues to increase from year to year. According to the Consumer Price Index, as of August 2020 inflation for the year is 1.3%. The average annual cost for rent in the U.S. has increased between 3%-5% each year for the past few years. If your money is sitting idle it’s actually losing value!
Put Your Cash to Work
Once you get a healthy financial routine of controlling your ongoing expenses, you can begin to put the rest of your earnings to work for you. Think of your primary checking or cash management account as your operating account. This account should hold enough to cover your ongoing fixed and variable expenses. You should not have any fees associated with this account. Now you’re ready to find other places to save your hard earned money.
Financial institutions will pay you in exchange for depositing your funds with them. They pool all of their deposits and invest them based on their internal regulations and business goals. There are three primary ways you will be compensated:
- Interest – banks, credit unions and online financial organizations pay interest based on the type of account, length of term and total amount deposited. All earnings are taxed each year as ordinary income, based on your income bracket.
- Dividends – money paid at regular intervals (usually quarterly) to shareholders on record out of company profits. Dividends can be withdrawn or reinvested. They are taxed when withdrawn.
- Equity – this represents the amount of an asset that you own outright. As the asset appreciates in value, your equity increases. Your earnings on equity are not taxed until the asset is sold and is based on the increase/decrease in value during the time period you owned it.
6 Places to Get Started
- High Yield Savings Accounts – You can take money from your savings account at any time. There is a restriction of a maximum of 6 transfers or withdrawals per calendar month. Interest usually accrues monthly based on a variable rate. Look for accounts that are FDIC insured or NCUA (Credit Unions). Good option for money you need for the next 18 – 24 months.
- Cash Management Accounts – These are a cash accounts that combine services and features that are similar to checking, savings and/or investment accounts under one product. These non-bank financial organizations tend to offer higher interest rates and simplify money management for those using their digital platforms. Some of the most popular include Acorns, Betterment, SoFi and Personal Capital. A good option to set up automatic savings to help you get started.
- Short-term Bond Funds or Money Market Mutual Funds – Although many banks offer Money Market Accounts, those offered by investment companies are able to offer higher returns based on the underlying funds in those accounts. These options are better for funds that can be invested for 24 – 36 months.
- Certificate of Deposit – these time based savings vehicles have fallen out of favor in recent years as interest rates have fallen. They are accounts that can be opened with a bank or credit union and are for a predetermined set period, such as 12, 24 months or 5 years. The interest rate and term are fixed and there is a penalty for withdrawing funds before the end of the term. As interest rates rise, these are still good options for secure savings for longer time-frames.
- Dividend Funds – you can invest directly in stocks that pay dividends or funds that are comprised of stocks that pay dividends. These accounts are definitely for more savvy investors and those looking for longer investment terms (3-5 years). This can be a good strategy for creating a consistent stream of dividends that can be reinvested for long term growth and used to supplement income later in life. Here’s a great resource from Financial Expert on Dividend Growth Investing.
- Peer-to-Peer Lending (P2P lending) has been growing in popularity over the past ten years. This might be a great place for a small part of your long term savings. You select the people (or multiple people) you want to lend to based on their profile and their ask. As loans are paid off, that money can be invested in new loans. A recent P2P lender in the Midwest is the Halo App.
Know Your Goals and Read the Fine Print
As with every financial decision you make, be sure to be strategic about your purpose and intention. Set up accounts that meet your short and long term needs and stick to your plans. Research and understand the pros and cons of each type of account and seek out the best offering available.
Always keep in mind the safety of your money – is it insured, guaranteed or not? Ask about fees and penalties that you might incur with each type of account. Make sure you seek tax advice to understand how earnings from each account will affect your income taxes now and in the future.
Start building your savings. Start with what you can and watch it grow over time. Keep it simple and manageable. Got questions? We’d love to help in any way we can.
Ready to Get Serious?
Sometimes it can be incredibly challenging to stay focused and committed to building a life you love. If you are feeling overwhelmed and looking for support, check out Financial Wellness 101 – The Ultimate Financial Handbook for Young Professionals. We also offer 1:1 Financial Coaching to help you create a clear roadmap to improve financial wellness.
Spend wisely. Save well. Find your Financial Zen!