Having cash on hand is never a bad thing. And whether it’s the result of disciplined long-term savings, or you’ve recently had an influx of money in the form of stimulus payments, knowing what to do with this money is key to maximizing your net worth and building wealth.
Considerations for Putting Cash to Use
When it comes to putting cash to good use, there are a few factors you’ll need to consider:
- Accessibility. How liquid do you need the cash to be? (In other words, how often will you be needing it?) Certain investments are more accessible than others. You’ll have to determine what level of liquidity is necessary for your business.
- Interest. Every vehicle/investment offers a different return on your money. Keeping cash in a savings account, for example, will provide almost nothing. Putting it in the stock market can produce gains of 10 percent or more in a single year. (But it can also cause you to lose 10 percent or more.) You have to weigh interest and risk accordingly.
- Involvement. How involved do you want to be? Some investments require your direct involvement, while others can be handed off and managed by someone else. It’s up to you.
- Consequences. Emergencies happen. It’s always possible that you’ll end up needing the money in the future. Make sure you’re aware of any penalties and fees associated with withdrawing money prior to maturity (if applicable).
5 Options for Your Cash
As you think about the four factors outlined above, here are some practical options to choose from:
- Pay Down High-Interest Debt
Sometimes you can use cash to earn interest, while other times you can use cash to avoid paying others interest. If you currently have a lot of high-interest debt to your name, using your cash to pay down the principal and get current (at a minimum) is the smartest thing you can do. Because once your debt payments are cleared from your budget, you’ll have significantly more cash to save and invest.
- Build Your Emergency Fund
Once high-interest debt is cleared, turn your focus to your emergency fund. Experts recommend keeping enough cash on hand to pay all of your bills for at least three to six months. This ensures you’re able to survive for a period of time (even with a total loss of income).
If you’re a single-income household, having a six-month emergency fund is smart. If you’re a dual-income household, you can probably get away with three months. (There’s less risk for total income loss.) But at the end of the day, that’s a decision you’ll have to make.
- Invest in Income-Producing Assets
There are literally dozens of different investment classes to consider. You’ve got stocks, bonds, precious metals, cryptocurrency, insurance products, business ventures, and more. And while it’s wise to diversify, give priority to anything that produces actual cash flow.
While income-producing assets – like real estate – typically require a more hands-on approach, there are still ways to streamline. If you’re worried about time, you can always partner with a property manager and pay them to handle all of the day-to-day tasks. Every city has good property management companies; you just have to find the right fit.
- Boost Your Retirement Savings
Are you behind on your retirement savings? There’s never a better time than the present to max out your retirement account (like a 401k or Roth IRA). It won’t feel like much today, but fast forward five, 10, or 20 years from now and you’ll be glad you made the sacrifice.
- Invest in Yourself
Sometimes the best interest rate is the one you don’t see. If you can spend money improving yourself, growing as a professional, and creating new business opportunities for yourself and your family, don’t hesitate. Whether it’s courses, books, mentorship programs, or business ventures, money invested in yourself will produce a better interest rate than anything a financial product can offer.
Put Your Money to Work
While there’s something to be said for having an emergency fund on hand to deal with unforeseen expenses, keeping all of your money in a savings account isn’t wise. Not only are you missing out on opportunities to earn interest, but you’re actually losing money over time due to inflation.
Now is the time to put your money to good use…choose wisely!