What to Do With Cash

Holding cash these days means watching taxes and inflation chew its value away. But you need some cash on hand for emergencies. How much, and how do you allocate it to get the best return in a time of extremely low rates?

Low interest rates were not a problem back in the 1980s, when they were sky-high. Back then, you could get certificates of deposit paying a double-digit interest rate.  Today?  Good luck finding a single-digit on the left side of the decimal point reading anywhere north of the number “1.” 

One solution: Ladder your CDs out over varying time periods, buying six-, 12-, 18- and 24-month maturities. So when interest rates rise, you always have a CD maturing and can re-invest the principal at newer, higher rate. 

For emergency money, you can continue to look for high-interest-bearing savings and money market rates.  The highest are usually paid to those with the largest balances. If you work with a credit union, you often can sometimes find a better rate than in a traditional savings account. According to the National Credit Union Administration, a five-year bank CD returns just 0.75% annually on average, but the same thing from a credit union pays 1.33%.

A personal favorite of mine is Capital One’s 360 account.  It used to be called the ING Orange account, but Capital One bought them awhile back. Now, it’s paying 0.75% interest with no penalties and Federal Deposit Insurance Corp. protection to boot.  You can transfer money from your bank or credit union to this account by visiting www.CapitalOne360.com and setting up an account. 

Meanwhile, have patience. With current CDs and money market returns, no one’s throwing a party, as taxes and inflation eat up the measly interest. Nevertheless, with the economy recovering, odds are very strong that rates will climb in coming years, making the interest more palatable.

Regardless of current rates, everyone should have an emergency stash invested in some sort of guaranteed savings or money market account.  The amount of emergency savings needed depends on whether you’re single or married, how many in the household are working or if you’re working at all:

            Marital/Working Status:                              Months of Savings Needed:

Married and both spouses work                             3+ months of expenses      

Single or Married & one spouse works                 6+ months

Single or Married & retired                                     12+ months

So, lets’ say your monthly household expenses are $4,000. If you’re single – or married, but only one of you works – you should have at least $24,000 in an emergency account.  If you’re retired with a $4,000, you should have around $48,000.  Married and you both work? Make sure you have a minimum of $12,000.

If you have a big expense and plan on spending any amount of your savings within the next one to two years, add that dollar amount to the total you figured out above. However, for anything beyond your emergency account and any money you plan on spending in the immediate future, you should be investing in some sort of longer-term investment portfolio. 

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Adam Koos, CFP, is an award-winning Certified Financial Planner, as well as founder and president of Libertas Wealth Management Group, Inc., a financial management firm, located in Columbus, Ohio.

Financial advisory and planning services offered though Libertas Wealth Management Group Inc, a Registered Investments Advisory Firm.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss.

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