Discover the basic reasons why you should explore your options before keeping your wealth in a standard checking/savings account and how to avoid overreacting if you find unique alternatives.
If you haven’t already, we recommend you read “How Banks Profit From Holding Your Hard-Earned Money.” because we explain what banks do with any money stored in a standard bank accout.
Personal assets fall under two categories: liquid or illiquid. Generally, the most liquid asset is cash/currency. Thus, if you have liquidity needs, you need to be able to turn your asset(s) to cash quickly depending on what you need the money for.
Often enough people need help to determine where to put their cash to work. Most people opt in for money managers with a background in finance & are held to ethical standards. Other times, people seek out ways to learn about investing themselves & take matters into their own hands.
When you speak to a finance professional, they need to profile you after greeting. They must do a risk assessment. They need to determine your financial position, longevity, personal risk tolerance, or a mixture of all and other factors.
The reason they build a profile on you is because they need to understand what your short, medium, long-term goals/needs are (they shouldn’t recommend volatile stocks like DoorDash, Uber, Airbnb, etc. if you are planning to start house hunting in 2 months).
You do not need to talk to an “expert” to know that you need cash on hand to put a down payment on a house or purchase a new vehicle.
So, this leads to my next point, if you have no immediate needs and plenty of cash to last for the next year, you need to stop “hoarding” cash and disallow it to erode with inflation in a plain bank account.
Here is what you can do instead—
- Exchange Traded Funds (Equity)
ETFs are “micro pieces stocks in a bag.” There could be ETFs with 100 stocks or ETFs with over 9000 like Vanguard’s VT. You may trade ETFs like stocks during the trading day from 9:30AM ET to 4PM on business days.
- Exchange Traded Funds (Bonds)
These are “fractions of bonds within bags of bonds.” They work just like their equity counterparts except they tend to be less risky (of course with less risks comes less possible returns), as bonds are higher in the food chain during a company’s liquidation.
- Mutual Funds
Similar to ETFs but you cannot trade them freely within the trading day.
You can test your inner wild self and invest in large cap or high beta stocks (more volatile) or a mixture of both.
- High Interest Saving Accounts
This is almost equivalent to cash. The difference is that with savings account there are limits to the number of withdrawals you may make in a given month. High Interest Accounts interests fluctuates. Banks like Ally, Marcus, earn you much better returns than that of a bank like Chase or Citi. However, your upside is very limited, and some inflation erosion still happens.
- Certificate of Deposits
Very similar to saving accounts, but your rate is locked in a certain short-term period.
- Treasury Bills or Notes
These are backed by the U.S. Treasury. T-bills are one year or less. They have a certain interest rate and are deemed quite safe. T-Notes are issued for a period of 2 to 10 years. Of course, these offer higher rates.
If you want to remain liquid (ruling out real estate and other extremely illiquid investments) and keep cash on hand, you may aim for one of these choices above (not an exhaustive list).
The S&P 500 has grown 11% YOY since the 1920s, inclusive of depressions, recessions, war, etc.
Not only do you have the growth in the investment, but you’d also earn dividend and through re-investment earn compounded gains. You can run the arithmetic if you wish, but a single $1000 in that time would have made you a multi-millionaire.
You can buy VOO from vanguard which is a popular passive ETF that tracks the S&P 500 with almost non-existing low-cost fees. You may purchase other low-cost ETFs that track tech stocks like VGT, or healthcare VHT, etc. or along the lines of international symbols like Europe VGK and Pacific region’s VPL.
And same thing applies for bonds. You can research more by googling equity or bond ETFs. I avoid actively managed ETFs or any other “managed” investments for that matter as they have extremely high investment fees. I prefer to stick to passive funds.
ETF’s, Mutual Funds, and Stocks tend to be inflation hedges. Once you decide you need the cash, you can sell these investments and within 5-7 days you will have your cash in hand (deposited in your liquid bank account). CD’s and Treasury assets not so much.
Remember the totality of your principal is never assured. Research wisely.
Don’t overreact when things are on the up-side, and don’t panic sell when investments are on the downside.
If it is down, great! Buy the dip! If it’s up, Awesome! It means your investment is growing & at this point your money is making you more money.
Timing the market does not work. You will likely fail.
P.S. Dollar-cost averaging is your best friend.
There are also other assets like Crypto that are extremely volatile, but highly liquid. If you have plans with your money, DO NOT put significant weight there, even if you believe in a project or certain crypto assets.
I own VOO, VHT, VGT, VGK, VT. I am not recommending, but merely facilitating ways of research for further education.
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