Cash is sexy. Cash is hot. It’s safe, super-liquid — and there’s still nothing like flashing a wad of hundies to make an impression in the club. But in an era when cash is paying almost no interest, is it still King?
Maybe. Cash continues to offer unique benefits, including some that stem from those current low-interest rates. Here’s how to make the most of cash in today’s financial environment.
Interest paid on cash has plummeted over the past 15 years. In 2001, a six-month CD paid an average of 5.13%. Today, that same investment offers about 0.16%. No good, right? Well, not if you are looking to invest a ton of cash. But there is a helpful silver lining to this situation. The rates we pay to borrow money are also way down. In September 2001, 30-year mortgages carried an average interest rate of 6.9%. Today, they average 3.5%.
And, again, cash does provide a buffer against market volatility that can be triggered by world events. In times of tumult, people are willing to trade returns for a good night’s sleep. That explains why money markets and other cash-holding vehicles have been the most popular asset for much of the past year.
Let’s say you suddenly have $10,000 in cash to invest from an inheritance, bonus or a really successful garage sale. What should you do with that money? Three things, in order:
Invest. The stock market is historically the best way to grow your wealth. Yes, it can be very volatile. Many people are stuck liking their psychological wounds from the market’s 40% drop in 2008. But over time, stocks outperform every other asset, including bonds, real estate and gold. From 2001 through 2015, the stock market provided average annual returns of 5.78%. So, it makes sense to put most of your cash windfall to work in the market ASAP.
Pay down your mortgage. This one depends on your circumstances. If you have a 3.5% loan, you might get a better return on your cash if you invest it, rather than apply it to your mortgage. But if you stretched to buy the house and the payments are onerous, you might want to use a portion of your cash to reduce that burden. Similarly, if you are approaching retirement, you might want to pay down/pay off your house before those regular paychecks stop.
Hold on to it. This is the least efficient use of those newfound Benjamins. But again, how much cash you hold depends on your circumstances. If you are in your 30’s your investment focus should be on growth stocks. The only cash you should hold is in your emergency fund (six months of living expenses) and whatever you are saving for a major life event, like buying a house or having a baby. Conversely, as you near retirement, you may want to hold more cash for the stability and liquidity it provides. If you are in your 60’s consider holding 5% of your assets in cash. Up that to 10% in your 70’s and 30% in your 80’s.
Whether or not cash is King, it’s certainly still a card that can help give you a winning financial hand.
Disclosure: The information is provided to you as a resource for educational purposes only. Nothing herein should be considered investment, legal, or tax advice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. It is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.