Sitting on Too Much Cash? Here's What to do With the Extra...
When you’ve built up a surplus of cash, it’s hard to feel like you’re doing anything wrong. After all, a surplus is indicative of a frugal lifestyle built on a foundation of spending less than you earn. Who could criticize that?
But money is more than just a resource you need to stock up – it’s a tool that can create even greater wealth if used correctly. In other words, money that’s just sitting around is a wasted opportunity.
There are plenty of things you could be doing with that extra cash that are low-effort and low-risk. If you’re ready to get your money working for you, consider these options.
How Much to Keep on Hand
You’re going to hear varying numbers here, but you should aim to keep six month’s worth of your must have expenses as an emergency fund (think rent, mortgage, utilities, groceries, insurance, and essential items you’ll definitely need to pay for no matter what). That amount will cover you in case you lose your job, face a prolonged illness or have to take time off work to care for an ailing relative. If you work for yourself or have children, you might consider saving a year’s worth of expenses just in case.
Any cash you’ve tucked away for an emergency account should be kept in a high-interest savings account. A savings account is the perfect tool for this because it’s liquid enough that you can access it within a couple days, but not located in the same checking account you use for daily purchases. You can use the same bank you use for your checking account or another if it offers a better rate.
A high-yield savings account will usually earn you around 1% interest a year if you’re lucky. That amount won’t match inflation, but it’s better than a checking account paying nothing.
Why Keep It Elsewhere
You risk losing money when you store excess cash in a checking account or under your mattress. Money’s like a plant – it can only grow if it’s kept in the right environment.
The longer you keep cash somewhere it’s not growing, the more you lose due to inflation. That means if you keep $1,000 in a checking account that’s not earning interest, it’s worth less every year.
Think of your money as an opportunity. The choice of whether to waste or seize that opportunity is entirely up to you.
It’s important to note though, that while you want to maximize the amount of interest you earn on your emergency fund, this is one chunk of money that for your financial planning purposes, isn’t meant to be invested or utilized in any way that could lose your principal balance. This emergency fund is meant to be available in case of emergencies, and last I checked, we don’t know when those will happen. There is an opportunity to earn more growth and income when deploying additional funds into savings accounts for retirement.
Other Savings Goals
Cash you’re saving for things you’ll need in the next three to five years doesn’t need to be kept in a savings account.
One popular option for short-term savings goals is a CD that will mature in a few years. A CD is insured by the bank and has a specific time in which you hold it. Rates will vary based on the bank you choose, how much you can deposit and where you live. You can compare rates online at Bankrate or NerdWallet.
Money market accounts are another option if you won’t need the money for a couple years or more. Some have higher rates than savings accounts and are also backed by the FDIC. Bonds are another option, but rates vary depending on when they mature and how the economy is doing. Your best bet is a CD or money market for short-term goals.
Invest the Rest
Once you’ve allocated money for your emergency fund and short-term savings goals, it’s time to invest any remaining funds for retirement. This money should be deposited in an IRA, 401k or other long-term savings vehicle. These accounts can provide a much greater return because you won’t have to access them anytime soon.
Popular options for retirement savings include index funds or target-date funds, most of which have low fees and decent returns. A financial advisor or planner can help you pick a fund if you‘re unsure which to go with.
Bottom line, if you’re sitting on more than six months worth of expenses in cash, it’s time to get a plan in place for how to allocate the rest in order to ensure your money is being put to work for you.
Advisors: How to Prepare Before Calling an Agency
Written by: Rachel Aelion-Moss
You’ve read my other posts:
Or are you?
I’m amazed how many prospects contact an agency without any advance preparation whatsoever. It’s not just that they don’t know what services the agency offers. The real issue is, they can’t even explain why they’re calling in the first place.
You might be raising an eyebrow at my suggestion that you actually need to prepare before calling a vendor. Don’t. I want to help you maximize your time, and potential investment.
Here’s why: The best way to use a vendor’s time during an initial call is to conduct a mini-discovery session. At FiComm, we will ask: What is your vision for your business? How do your services address your market’s needs? Where are you headed as a company? What will get you to the next level? What marketing obstacles do you face? That information shapes our remarks, ensuring that everything we say will be directly relevant to you.
Many advisors find those initial conversations enormously valuable in their own right. They help clarify their thinking. But others feel put on the spot. They freeze. They respond in standard brochure-speak: “We were founded in 1984, we have four advisors, we serve 200 households with an average account size of $400,000.”
Or they say, “We were hoping you would tell us the answers to those questions.”
Well, that’s helpful.
Imagine you’re meeting a potential wealth management client for the first time. They have $700,000 in a brokerage account, $400,000 in a retirement account, two kids, a dog and a house in L.A. Great. You start by asking their goals for themselves, their money, and their family.
Puzzled, they tilt their heads and say, “We were hoping you would tell us.”
See what I mean? How can you possibly come up with a solution for clients who can’t even articulate their goals, or speak to their financial pain points?
The same is true for us vendors. Before we can help you, we need to know where your business is going and how you think marketing can help you get there. The answers don’t have to be “right” (and we’ll help you get there), but it you come prepared to participate, our conversations can be very fruitful. If you don’t—well, it’s hard to deliver value for you. We know we’ll constantly have to prove ourselves and remind you why you hired us.
“But, Megan,” some advisors say, “we’re not ready for that. We’re just trying to understand the basics. How will we learn if you don’t tell us?”
If you’re calling an agency just to get a general marketing education, then that’s what you’ll get—general information, most of it irrelevant to you, and lacking the specifics you’re really looking for.
So, don’t call an agency to be your marketing tutor. Instead, read. Advisors have never had better access to self-help insights and information—through trade pubs, custodian relationships, blogs, podcasts, other advisors and industry pundits. Be curious. Be inquisitive. If you hear something on a podcast that intrigues you, follow the host back to LinkedIn. Read what they write there. Email your questions. Attend a webinar. Be an active participant at industry events.
At some point, you’ll understand the basics. You’ll have identified your own issues. And narrowed down your questions. Then, finally, you’ll be ready to call an agency.
Instead of saying, “Tell us what we need,” you’ll say, “We need help with this.“
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