Now more than ever it is important to have a plan to make the most of your cash.
“Protection of principle becomes top priority in times of financial crisis,” says Jeff Rose, a Certified Financial Planner TM, one of the founders of Alliance Investment Planning Group LLC in Carterville, IL and the blogger behind GoodFinancialCents.com.
“Cash should always be part of your overall financial plan,” says Rose. "Most people refer to this as your emergency funds.” He recommends that you have between eight and 12 months of expenses in some sort of fairly liquid cash vehicle. This way, it is easily accessible and it can provide a safety net in case of financial emergency.
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If you have investible assets beyond your 12 months of expenses, Rose suggests that you consider putting some of your money in short-term or intermediate-term bonds. “If you prefer a little more risk, conservative stock investments that focus on dividends could be considered.” The key is to use cash as part of an overall investment plan that blends sufficient returns with a degree of stability and security.
Cash offers lower returns than other investments, so it is important to make the most of it. Instead of traditional savings accounts, Rose recommends high interest savings accounts, such as those you find online through institutions like ING and Emigrant Direct, and certificates of deposit (CDs). These are protected by FDIC insurance, ensuring that your money is safe. You do have to watch out for penalties if you withdraw money from a CD early, however. A few banks, notably Ally Bank, offer no-penalty CDs that are more liquid than traditional CDs.
If you want higher returns on your cash, you might try looking at more exotic products. Money market accounts can provide higher returns (just watch out for minimum account levels), and many of them are also FDIC insured. Money market funds also provide a great deal of liquidity and higher returns. However, money market funds are not FDIC insured, so realize that, while not very likely, it is still possible to lose money on this type of cash investment.
