Invest The Extra Money In Your Savings
A common question many people with a healthy savings ask is what to do with extra cash in the bank. If you’re in a position where you have a lot of money sitting at the bank in your checking or savings account and you’re frustrated that banks do not pay any interest, join the club.
Right now, interest rates are controlled by the Federal Reserve. At nearly 0%, banks can’t pay much, if anything at all, on savings accounts. This isn’t a new issue. Banks have been in this spot since the financial crisis of 2008. So, what can you do with the extra cash at the bank? The easy answer is: INVEST IT!
What To Do With Your Extra Cash
There are several ways to invest the extra money in your savings account. Here are two considerations when determining if you’re ready to invest your extra cash in the bank:
- If you do not need the money for at least a year
- If you are willing to take on some risk to the original amount invested
Investment Options With Extra Savings
So, clearly there are options for what to do with the extra cash in the bank. Remember, investing can lead to loss of the investment principle. Additionally, there is no such thing as a guaranteed returns when it comes to an investment. Therefore, if you take no risk, you make no returns.
If you take into account inflation by leaving money sitting in cash, you’re likely to lose purchasing power on your money. This means $1 today may only buy $0.95 worth of stuff in a year. That’s what happened over the past year. Inflation has taken off with the restart of the economy and after the COVID shut down in 2020.
Invest Your Extra Money
The type of investing vehicles on where to invest your extra money all depends on three factors: your timeframe, risk tolerance, and how much of the money you may need at different points in time. Let’s run through a few places that are common liquid investments used today that could be places to get that cash working.
Stocks are by far the most talked about asset class out there to invest extra cash in and grow it. Stocks are also more long term oriented. This is because, over the short term, they can lose a dramatic amount of value in a relatively small time frame. There’s an old saying on Wall Street that stocks take the stairs up and the elevator down. However, over the last 90 years, stocks have averaged close to 10% annual returns with dividends reinvested. Despite the volatility, they have been a great place to invest extra cash in the bank over the long term.
How To Invest Extra Money In The Bank
Bonds are traditionally a more conservative asset class. Right now, with interest rates as low as they are and inflation higher, some bonds are yielding a negative rate of return. Therefore, this is not the most ideal environment for bonds right now.
REITs stands for Real Estate Investment Trusts. This is the easiest way to invest in commercial real estate and have liquidity to the money. Since REITs inception about 50 years ago, they have averaged around the same rate of return as stocks. However, they offer little diversification because they are directly correlated (meaning they won’t move in the same direction at the same time).
Ways To Invest Excess Cash
Cryptocurrencies have been white hot over the past year. Crypto is the newest asset class to emerge over the past 10 years. There’s not a long track record for returns because most cryptocurrencies have come around within the last 10 years. This is not a huge sample size to see how they would do in a down market cycle for 10+ years like we saw in the 1970s or from 2000-2009.
Derivative securities are investments that derive off another investment such as options. These tools can help leverage on more risk or hedge potential risk in a portfolio. Derivative securities are more complex investments, but when used within a portfolio, they can be a great tool for extra cash sitting in the bank.
All of the asset classes above are simply tools to get the job done. It all depends on the job you want to get done. Do research to see what mix makes sense for you. Or talk with an investment manager to help build the right portfolio for your specific situation.
Call (609) 439-1687 today to speak with Client Focused Financial and contact me, Dan Westfall, directly.