Let’s face it: Trying to figure out what to do with a cash surplus is a great problem to have.
Still, whether you’ve received a sudden windfall of cash in the form of a work bonus, an inheritance or profits from a property sale, or if you’re simply looking for a new saving strategy, doing so in this economy can be particularly tricky. Market conditions are creating a cash conundrum: Investing is risky and buying real estate isn’t an option for many due to supply issues. But leaving money liquid can have significant downsides as well due to today’s high inflation rates.
At current rates, cash has lost more than 8% of its value since last year, and the average savings account yield of 0.06%, according to Bankrate, is doing little to offset that.
“You’re automatically taking a risk by leaving money in cash,” says Michael Tanney, a senior managing director at Magnus Financial Group LLC. “Cash is much more volatile than people realize, because they don’t see the number moving up and down in their bank account.”
Your first move, of course, should be to make sure you’ve got your financial basics covered. That means having an emergency fund with three to six months’ worth of savings, eliminating high-interest debt and making sure you’re on track to save at least 10% of your income for retirement (including your savings and any employer match). Experts say money that you need in the next year or two still belongs in a liquid savings account, where you can access it easily.
[Read: Best Savings Accounts.]
If you’re lucky enough to have all those boxes checked, there are lots of paths you can take with your extra cash, especially if you don’t need it in the near term. If you plan to use this cash in the next year or two, keeping it liquid or in a high-yield savings account is likely the best near-term strategy.
“There are a number of possibilities, and it will depend on whether you’re looking more for liquidity or for yield,” says Stephanie Genkin, a certified financial planner and founder of My Financial Planner in Brooklyn, New York.
Here are a few options to consider, each with their own pros and cons:
I-Bonds
Current inflation rates mean that these U.S. savings bonds are paying 9.62% on an annual basis for I-bonds purchased through November, at least for the first six months they’re held. After that, rates will adjust based on inflation.
Pros: I-bonds are a good inflation hedge, and it’s hard to find a guaranteed return of 9.62% in other investments right now.
Cons: You can only buy I-bonds directly through the Treasury (TreasuryDirect.Gov), and you’re limited to $10,000 per individual per year. You can’t access the money at all for the first year after the purchase. If you redeem them before five years, you’ll forfeit the most recent three months’ worth of interest.
[Read: How Much Should I Save? Use These Benchmarks to Reach Your Savings Goals]
Tax-Advantaged Investment Accounts
The best account for you depends on your financial situation:
— If you’re not maxing out your workplace 401(k), you can sock away up to $20,500 this year (plus an additional $6,500 if you’re older than 50).
— If you have a child or grandchild whom you want to help with education expenses, consider a 529 plan. The contribution rules vary by state, but money grows tax-free and can be used tax-free for qualified education expenses.
— If you have a high-deductible health plan at work, you can set money aside in a health savings account to pay for health-related expenses now or in the future.
Pros: Tax-exempt and tax-deferred accounts can both lower your tax bill now and further boost the benefits of compound growth in the future.
Cons: If you need to use the funds for a reason other than the account’s purpose, you could owe taxes and penalties.
[Money Saving Challenges to Try in 2022]
Diversified Brokerage Account
For money that you don’t need for at least the next few years, a down market provides an opportunity to buy investments at a discounted price from their recent highs.
“The whole idea of having liquidity is to take advantage of sales prices on assets, whether it is in the stock market, the bond market or the housing prices,” says Brett Anderson, president of St. Croix Advisors.
Pros: There’s no limit to the amount of money you can hold in a brokerage account and no restrictions on when you can make withdrawals or how you can use that cash.
Cons: While diversifying your holdings by buying mutual funds across multiple asset classes can provide some protection against market volatility and such portfolios have historically delivered significant gains, investment returns are never guaranteed.
More from U.S. News
What Is Inflation? What Rising Inflation Means For You
I Bonds: Lock in Nearly 10% Yields as Stocks Plunge
What to Do With Cash Right Now originally appeared on usnews.com
Correction 05/31/22: A previous version of this article misstated the amount of interest forfeited when redeeming Treasury Series I bonds early.
