Quite often I hear concerns over the low yield of savings and money market accounts these days. I am always asked where to get the best interest rate. While the yield of your savings account is important, it’s not the most important detail regarding your cash type investments. Here are two reasons not to chase yield.
1.) Safety – This is relatively easy to understand but often forgotten. Remember, higher yields usually equate to more risk. This is especially true in the bond world, but this can also occur with unstable banks seeking to bring in new clients. Sometimes banks are not as “safe” as perceived.
Cash type investments need to be held in “safe” accounts. As my friend, Bert Whitehead, and author of “Why People do Stupid Things with Money” always states, safety trumps yield. This motto should be written on the back of your hand. It’s not worth chasing a few extra dollars if it puts your hard earned money at risk.
2.) Liquidity-Cash type investments should be liquid and accessible. Investing in an online bank that pays a higher interest rate but carries certain withdrawal restrictions may not be a good fit. Savings accounts are one of the great safety nets in our financial world. They are meant to create peace of mind and not stress and worry.
Simply put: Cash type investments should not involve risk. Risk should be reserved for the equity (stock mutual funds) side of the portfolio.
As a holistic financial advisor who is always looking at the big picture, it’s important to know the role that each asset plays in the puzzle of our financial plan. Cash type accounts are the necessary portion of our portfolio to establish stability. Without stability, we are susceptible to financial failure.
While it may sound as if I want you to bury your cash in the back yard or stuff it in the mattress, it is not the case. I am for squeezing every dollar we can out of our portfolios, but it is vital not to create harm while doing so.
There are right ways and wrong ways to protect and invest your cash. Even with FDIC protection, we must make sure we understand the limits and risk. Next time you need to invest cash, you should ask yourself if the institution or method of investment is jeopardizing your safety or restricting the liquid nature of your cash.
How do you invest your cash? Have you had a bad experience with a cash type investment?