What You Can Do With Extra Cash

Posted by Jacob Radke

4.17%, that’s the yield right now on a government money market fund. A fund where the price does not deviate from $1, unless of course the money market fund breaks the buck.

At the same time the average US savings account rate stands at 0.35%. To frame that, in your savings account $10,000 would earn you $35 in one year, but a money market fund would earn you $417.

This is how banks make money in the first place. They take your savings and lend it to other people or in the public markets (generally short term government bonds). They rake in the difference between the $417 you could get and the $35 you do get.

But that is just the start.

How Many People Have Spare Cash

One of the most common questions we get is not, “how do we budget?” or “what are the best stocks to buy?”, it’s “what do I do with all the extra cash I have?” and “how can I use my high income to my advantage?”

Overall many just plain money market funds have increased the amount of money they manage by more than 50%. This mean people, not all, have excess savings that they don’t know what to do with.

Well let me tell you there are 2 things you can do. You can choose to spend it or you can choose in invest it, and you can make a conscience choice for leaving it in cash.

Maximizing Your Returns: A Guide to Investment Options

Money market funds are a cash investment, one of the lowest risk investments you could make. You may be able to earn something but overtime other vehicles could do better.

Risk adverse people may be better suited for an all stock portfolio, better suited for an all bond portfolio, or a combination. As you can see cash (1-3 month treasury bills) was relatively flat from 2008 to today, so just because higher rates are here today it doesn’t mean that they will stay.

Looking at average 1 year rolling returns (percent change from 1 year ago at any given month) the average for cash is 1.86%, the aggregate bond index is 4.55%, and the S&P 500 is 11.49%. But the cost of admission for each one of those is different. Cost of admission is the volatility you experience during your time horizon, stock waver much more than bonds and bond waver much more than cash.

The Best Place to Park Cash You Need in 2023

Going off of what I stated before, cash is no longer trash. For a limited time, this might not be a bad place to park cash that you are going to need relatively shortly.

What you don’t want is to invest in riskier assets and then have those assets fall in value at the time you need to pull that cash.

The other thing this allows you to do is wait for an optimal time to enter the markets. This is what fund and portfolio managers are doing.

Some have massive cash positions in their funds yielding 4%+ waiting for attractive entry points in stocks and bonds as they see fit. It gives them the flexibility to tactically enter the markets without sacrificing returns in the short term.

That is no different than what you can do with your financial life. You can park cash that you need, or don’t need, and wait for a time when you need to pull that cash or invest that cash in the markets as opportunities arise, to the extent that you reasonably can.

The Best Place to Park Cash You Don’t Need in 2023

If you have a buildup of cash and don’t need it, the simplest thing you can do is start finding your goals, setting your risk tolerance, and start dollar-cost averaging in the markets.

There is risk in markets right now where the Fed has overtightened and that the Fed will need to tighten more, each is pulling with equal strength. The former means a recession, and the latter means more of what we experienced in 2022.

The silver lining is anytime there is a 20% discount on the markets, it has shown to be a great time to start buying. Warren Buffett has a quote like that too, “buy when there is blood in the streets”.

The simple dollar-cost averaging strategy into your investment strategy will help keep the risk that you invest at the worst time and smooth it out over a set time frame.

So the real answer is to talk to a financial professional about it and develop an investment strategy.

Hopefully this post has helped you if you have excess cash figure out what you could do with that extra cash.

For questions or comments email me at runningthetape@gmail.com.

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