Transcript summarized below:
With geopolitical conflicts on the rise, the Fed may reconsider its stance on raising interest rates this year leaving yields near all time lows. If you have additional cash on the sidelines and are unsure of what to do with it, this video will help provide you with some options to consider. Let's get into it.
Hello and welcome to another video from One-Up Financial. I am your host Eric Presogna, CPA and Certified Financial Planner here to help you increase income, reduce taxes and invest smarter in retirement.
Before I dive in to the meat and potatoes of this video, I just want to take a moment to think about the innocent people in Ukraine who are suffering and dying as well as the ordinary Russians who will suffer from sanctions, instability, and economic damage. I hope and pray that diplomacy can end this crisis for all our sakes.
Moving on, I'd like to address a popular question I get from clients and prospects and that is, "Where should I be investing my cash?"
Before I answer this question, I first need address what's called an emergency fund, which is just a basic savings account set aside for unexpected costs. The CFP Board recommends 6 months of living expenses sitting in cash. If you don't have that covered, make it a top priority.
Next, ask yourself what specific goal(s) are you trying to achieve? Buying a vacation home? Retire in 5 years? Or simply to earn more than the rate of inflation? Establishing intent before blindly putting money to work will ensure your strategy aligns with your goals and will help keep you from making mistakes down the line.
Lastly, take a quick assessment of any high-interest debt outstanding. This includes credit cards, personal loans, etc. Paying off a loan with an APR of 10% means, well, you earned 10% on your money, guaranteed.
Once you've established a comfortable emergency fund, outlined your financial goals and paid off high-interest debt, here are some options for investing excess cash broken down by short, medium and long-term goals.
A real quick note before I begin: This is not investment advice. The topics I discuss are for informational purposes only. Please consult your tax or financial professional before making any investment decisions.
Short-term Goals - 1-Year or Less
High yield money market and savings accounts through neobanks. FDIC insured. Low minimums. No maintenance fees. Limited amount of transactions each month.
Series I bonds - These are long-term government bonds that you can sell after 1 year and still capture a healthy yield. The coupon is tied to the rate of inflation meaning the yield is currently very attractive. If you buy Series I bonds and sell before 5 years, you'll lose 3 months of interest. But with current interest rate of 7.12%, you'd still earn over 5% if you sold after 1 year. The catch is there's a $10,000 max per taxpayer per year, $5,000 extra if you use your tax refund. And the rate resets semiannually so if inflation drops considerably, the yield may not be as attractive.
Cash Back Rewards - This isn't a place to invest cash, but rather an alternative to earn money on what you spend whether that be sign-up bonuses or rewards. For example, I signed up for a credit card with a large institution last year that rewarded me $500 in cash because I spent $3,000 in the first 6 months (their introductory period). That's at 16% return on my money and a no-brainer.
The same goes for using your credit card wisely (i.e. paying off each month to avoid interest costs) on day-to-day expenses and receiving cash back rewards. I earn 1.5% on almost all of my living expenses each year, double what online banks are paying on money markets.
Mid-term Goals - 3 - 5 Years
Depending on your risk tolerance, a money market account may be best suited for your mid-term goals.
Series I bonds can also play a role here. You'd simply hold for longer than 1 year and continue to add $10,000 each year, assuming of course the interest rate remains favorable relative to other cash options in the marketplace.
Taxable investment account - low to moderate risk profile target here. That, of course depends on your personal risk tolerance, but I wouldn't consider putting any more than 30-50% of your money in equities with a dividend tilt, and would favor shorter duration fixed income for the remainder. And given this is a taxable account, ETFs may make more sense given their tax efficiency relative to mutual funds. Be mindful of capital gains as if you intend to use this money, you'll have to convert those investments to cash at some point which will trigger a taxable event.
Long-term Goals - 7 Years or Greater
Again, taxable investment account, though adjusted for the longer duration of your savings timeline. Meaning, a diversified ETF portfolio that encompasses more growth and momentum strategies with more weight on stocks than bonds.
Next is to look for what I call the "low hanging fruits" because they represent easy ways to put money away while saving money on taxes. These are things like maxing out a traditional or Roth IRAs or participating in your work's 401(k) plan to get the company match. Now, these low hanging fruits are age dependent, meaning if you're 50 and need to tap this money in 7 years, you may be taxed and penalized depending on the type of account you set up. A traditional IRA gives you the tax benefit today as contributions are deducted from ordinary income, whereas the Roth saves you more in retirement as distributions are tax free and not subject to required minimum distributions.
You can also look to max out your 401(k) contributions if you're only contributing enough to get the company match. The maximum you can save in a 401(k) in 2022 is $20,500. If the plan allows for after-tax contributions and in plan Roth conversions, then you might be able to take advantage of the Mega-Backdoor Roth strategy which allows you to invest up to an additional $40,500 each year in a Roth, less any employer match.
Now if you're looking for something different than traditional investments and IRAs, and assuming you have the appetite for it, alternative investments can be an option for a portion of your cash.
Fundrise, for example, is an investment platform designed for those interested in earning high yields from real estate investing and prefer not to own brick and mortar. Now this is different from just buying a REIT in that it's crowdfunded, meaning you and thousands of other investors are all pooling your money towards large real estate details that will generate a stream of passive income.
Masterworks is another alternative investment option that allows you to invest in the art market which has very little correlation to the broader stock market and has boasted an impressive track record of returns. So for example, you could own a tiny fraction of a Warhol or a Monet and participate in the appreciation of that artist's work.
Lastly, start a business. This doesn't have to be the next Uber or Tesla where you're raising millions in venture capital and putting your life savings on the line. It could be a hobby you can profit from, a pain point in the marketplace you've developed a unique solution to, a rental property in a good area with stable tenants. I should note this option isn't for everyone as the risks can be far greater than investing in a 60/40 portfolio of stocks and bonds. But it can be highly rewarding, both financially and emotionally for those interested.
If you have any questions about anything I discussed today and would like to chat further, please don't hesitate to call or email me personally.
Thanks as always for watching our videos. If you're interested in staying up to date with our market and financial commentary, please subscribe to our blog at oneupfinancial.com/blog or follow us on LinkedIn and Facebook. Thanks again, and we'll see you in the next one.