Understanding Risk/Reward of Cash Investing—
Hi I’m Erik Wolfers. I’m the managing member of First & Main Financial in Oakland and Piedmont California. Today I’m going to talk a little bit about cash. Often times people come to us who have a big pool of cash and they’re not sure what they should do with it. They want to have some level of conservatism in their life, but cash or a long period of time, if you don’t use the cash and the cash is not invested, serves as a way to decrease your wealth in the future.
Sometimes people have cash that’s in a savings account at a bank earning virtually nothing. There are online savings accounts that are FDIC insured that we’ll refer people to, where they’re making more than 1%. Interest rates have been coming down recently but for quite a while you could get to 2, 2.1, 1.85% on your money and it’s not very hard to establish.
It’s also good to do a long-term calculation, a long-term cash flow model for your retirement or your future and through that process try to determine what is an appropriate amount of cash to hang onto; because if you take some of the cash that you might not need in an emergency or for anything and you invest it for the long-term, this is very likely going to serve to increase your wealth, which could result in a better standard of living in retirement or possibly retiring early or paying for kids college. Of course more wealth can be used for whatever the preferences are by the individual.
So if you have a lot of cash, think about how much you really need. Get help doing math on how much you really need and if you do need to hold cash for a while put it someplace safe, someplace insured that pays more than your traditional bank savings account.