Parked cash can often be a problem for investors. When you have cash lying around, it's not earning you any returns, and inflation can eat away at your purchasing power. However, investing cash can also be risky, and the returns are not always guaranteed. In this article, we will explore how to park your cash efficiently so that you can earn some returns while minimizing risk.
Understand Your Goals and Time Horizon
Before you decide how to park your cash, you must understand your goals and time horizon. What is the purpose of this money? Are you saving for a down payment on a house, planning to buy a car, or saving for retirement? Knowing your goals will help you determine your time horizon. If you need the money within a year or two, consider parking it in a savings account or a short-term CD. Consider investing in stocks, bonds, or mutual funds if your time horizon is more prolonged.
Consider a High-Yield Savings Account
A high-yield savings account is an excellent option for parking your cash. These accounts offer higher interest rates than traditional savings accounts, so your money can earn more while you wait to invest. These accounts are FDIC insured, so they are very safe. You can find high-yield savings accounts online or through your local bank. Some of the best online savings accounts are Ally, Marcus by Goldman Sachs, and Capital One 360. These accounts offer interest rates of 0.50% or higher, much higher than the national average.
Look into Short-Term CDs
Certificates of Deposit (CDs) are a type of investment where you deposit money for a set period, and in exchange, the bank pays you a fixed interest rate. Short-term CDs typically have terms of three months to one year, and they offer higher interest rates than savings accounts.
Invest in Treasury Securities
If you want a safe, low-risk investment, consider investing in treasury securities. Treasury securities are debt obligations issued by the U.S. Department of the Treasury. They are considered very safe because the full faith and credit of the U.S. government back them.
Consider Municipal Bonds
Municipal bonds are debt obligations state and local governments issued to fund public projects such as schools, roads, and hospitals. They are considered relatively safe because the taxing power of the issuing government backs them. Municipal bonds offer tax advantages because the interest income is typically exempt from federal income tax and may be exempt from state and local taxes. However, you should consult a tax professional to understand how municipal bonds will impact your tax situation.
Invest in a Money Market Fund
A money market fund is a type of mutual fund that invests in short-term, low-risk securities such as treasury bills, commercial paper, and certificates of deposit. Money market funds are safe because they invest in high-quality, low-risk securities. Money market funds are designed to maintain a stable net asset value of $1 per share. They are not FDIC insured.
Consider Peer-to-Peer Lending
Peer-to-peer lending is a relatively new investment option that allows individuals to lend money to other individuals or small businesses through online platforms. This type of investment offers potentially higher returns than traditional savings accounts or CDs but also comes with higher risks. When investing in peer-to-peer lending, it's essential to understand the platform's underwriting standards, borrower creditworthiness, and default rates. It would help to diversify your investments across multiple loans to minimize risk.
Look into Real Estate Investment Trusts (REITs)
Real estate investment trusts (REITs) are a type of investment that allows investors to own a share in a pool of income-producing real estate assets. REITs can provide a steady income stream through dividends and offer potential for capital appreciation over the long term. REITs can be publicly traded or non-traded, investing in various real estate sectors such as commercial, residential, and industrial. When investing in REITs, it's essential to understand the risks associated with each sector and to choose a diversified portfolio of REITs.
Seek Professional Advice
If you're unsure how to park your cash efficiently or have a significant amount of money to invest, it may be worth seeking professional advice. Financial advisors can help you understand your goals, assess risk tolerance, and create a personalized investment plan. When choosing a financial advisor, it's essential to consider their qualifications, experience, and fees. It would help if you also asked about their investment philosophy and how they plan to manage your money.
Conclusion
Seeking professional advice can also be beneficial, especially if you have significant money to invest. By taking a thoughtful and strategic approach, you can park your cash efficiently and earn some returns while minimizing risk.
