In previous weeks we talked about the various ways to diversify your money among stocks and bonds. A third component of spreading your money is CASH. It is important to keep a percentage of cash on hand for various reasons:
- safety - the value stays reasonably consistent,
- liquidity - it's available with no hassle when you need it,
- opportunity - when a time to enhance your portfolio comes along the money is available to buy more stocks or bonds,
- emergency - with an ample cash cushion you won't run up credit card debt incurring huge interest charges.
Other than stuffing the cash into your mattress or hiding it in a coffee can in your closet here are a few places to keep your cash:
- plain old-fashioned bank savings account (FDIC insured),
- short-term bank CD (certificate of deposit) (also FDIC insured) where you have immediate access if you are willing to incur the penalty and lose the interest but in this low-interest environment, you won't be sacrificing much,
- money market, which is actually a money mutual fund of a variety of very short term investments ( may be FDIC insured if at a bank) and usually pays a higher return than a savings account,
- short-term bond fund, which is a grouping of bonds that mature soon and frequently. These are definitely not FDIC insured and will go up and down as the bond market reacts to various events. Because these funds hold very short-term investments, they are not very volatile, reasonably safe and offer a higher return.
Be $ Smart - find a good home where you earn some interest on your "safe" cash investments.
