Hello Young Person With Cash, You know that you have to invest some of your money in places like retirement accounts. However, not all of your money is for long term investing. You need to keep some money in the form of cash. This leads to the question: What to do with cash? There are options for what to do with cash. Let’s get to it!
But, Before I Discuss What To Do With Cash…
Before discussing what to do with cash, I’ll discuss what money should be kept in cash.
Cash is an asset that loses its value. While the face value of cash does not change, the buying power of cash decreases through the power of inflation. In short, with inflation, the same amount of cash buys less and less over time.
Because of this decrease in spending power, we should keep only what is necessary in cash. All other money should be invested with a goal of, over the long run, beating inflation and growing your wealth.
What Money Should Be Kept In Cash?
Money that may need to be spent in the near future needs to be liquid, in other words in cash.
I consider the near future to be two years or less.
Therefore, the categories of money that I keep in cash are as follows: money to pay month-to-month bills, my emergency fund, and money for a planned expense that will be needed in less than two years.
Of these accounts, the emergency fund is the largest. Because of the relatively large size of your emergency fund, you may think that it would be a good idea to invest it. However, you have to keep in mind that an emergency fund is not there to make you rich. It’s there to keep you from being thrown into dire straits when some unexpected monetary event occurs. Think of when COVID hit. Some people lost their jobs and therefore their income. An emergency fund acts as insurance to allow you to be able to continue to pay your bills in such tough situations.
Another cash account that you should have is one for known upcoming expenses. This is money set aside for things that are not monthly expenses, but are nonetheless known upcoming expenses.
What To Do With Your Cash?
Choice Number 1
The first thing that you can do with cash is keep it at home. Some people keep cash at home under the mattress or buried in a can in the yard. There is a famous personal finance influencer who laughs at those people. I wouldn’t laugh at those who keep some cash at home. Some people do it because they like to pay cash rather than use a credit card. Or, perhaps they are preppers, who think that it’s important to keep some cash. (This cash can be thought of as a prepper’s emergency fund.) Those people who do keep some cash at home just need to keep in mind that the money kept at home is losing value.
Choice Number 2
The second thing that you can do with cash is to put it into a savings account at a local financial institution. Local financial institutions usually do not pay much in terms of interest. While I like for my money to make as much money as possible, I think that even if you only keep a small amount of money in a local financial institution, it can be useful to do so in order to form a relationship with a local bank or credit union. This relationship may come in handy at some point when you need a loan or something. You just never know!
I use my money for paying my monthly bills to accomplish the “form a relationship with a local financial institution” goal.
Choice Number 3
The third thing that you can do is to put your cash into a High Yield Savings Account (HYSA). I think this is the best place to keep an emergency fund. The money in an emergency fund needs to be available in case of an emergency. HYSAs are found at online-only banks. Because these online banks don’t have brick and mortar locations, they can offer higher interest rates than brick and mortar banks (which have to pay for the buildings and everything that go along with having the buildings).
Choice Number 4
The fourth place where you can put some (not all) cash is into short term instruments that lock your money up for a short period of time.
Since all of the money that is being held in cash is for short term needs (such as paying monthly bills, emergencies, or scheduled expenses that are two years or less away), I only lock up money for 18 months or less.
Furthermore, I would not lock this money up unless it pays more than the HYSAs.
Where can I lock money up cash for a short term in an instrument that possibly pays more that a high yield savings account? Look into certificates of deposit (CDs) or Treasury bills.
What To Do With Cash: Key Takeaways
- The only money that should be kept in cash are as follows: money to pay your monthly bills, money for planned expenses that are two years away or less, and your emergency fund.
- You could keep money at home. But, that is where it loses the most value, because it earns zero interest.
- Even though local banks don’t pay the highest interest, it can be a good place to keep your monthly bill-paying money (or some small amount), because it can be beneficial to build a relationship with a local bank.
- The best place to keep your emergency fund or money for a planned expense that is two years or less away is in a high yield savings account because the HYSA pays higher interest than local banks.
- If you can find CDs or Treasury bills that are 18 months or shorter, that also have interest rates that are higher than the HYSA, you may want to put some of your emergency fund (or money for a planned expense that is two years or less away) into those.
That’s all for today.
Remember that managing your cash is part of your overall money management plan.
You have to control your money. Otherwise, money will control you.
Hugs,
Rich Mom
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Also, please note: I am not an investment advisor. Always do your own due diligence and research before investing. Check with your own investment advisor.
Also, remember that past performance is not a guarantee of future performance.
The information shared here is not intended as financial advice, just entertainment and entertainment.