My family and I just got back from a big international trip over the holidays. Fortunately, because of the strong dollar, the vacation cost less than we budgeted for. So after paying our credit card bills, there was extra cash in the checking account.
Now I need to do something with it.
The problem is, I like having cash. I remember when I didn’t have any, and it gives me comfort knowing it’s there. At the same time, I know that having cash sitting in a checking account earning a few decimals of a percentage point isn’t helpful.
If you have cash lying around that is earning nothing, you should put it to work. Keep in mind, I’m not talking about the six months of emergency reserves that everyone should have and be able to tap into if needed. I’m talking about the cash that is in excess of six months’ worth of expenses.
Here are several ideas on where your money can earn some income or generate wealth.
If you don’t want to lock up your money for long, short-term U.S. Treasurys are a good place to put your cash for a few months.
A three-month U.S. Treasury bill currently yields 4.6%. A six-month bill yields 4.8%, though a one-year bill yields 4.7%. I have several short-term Treasurys in my account and will be buying more next week.
I recommend sticking with Treasurys over certificates of deposit (CDs). The top six-month CD rate is 4.5%. You may as well earn a higher rate from Treasurys.
If you have at least a one-year time horizon, take a look at Series I savings bonds, also known as I bonds. These are bonds whose rate changes every May and November based on inflation. When inflation is high – as it is today – these bonds pay a high rate of interest. When inflation is low, so is the I bond rate.
Today, you’ll earn an annualized rate of 6.89% until May, when the rate will change again. This is an incredible rate for what is the safest fixed income product on earth, considering it is backed by the full faith and credit of the U.S. government.
A few important things to understand about I bonds… You do not receive cash interest payments. Rather, the interest is added to your principal. You cannot take your money out until one year has passed. If you withdraw your funds before five years, you’ll lose three months’ worth of interest. Lastly, you can invest any amount but only up to $10,000 per year per person.
For those who can take on a little more risk, investment-grade corporate bonds are a good deal right now. You can earn over 5% on A rated corporate bonds maturing in one to two years. An A rated bond is extremely unlikely to default.
If you don’t need the cash for a number of years, I strongly recommend investing in Perpetual Dividend Raisers – companies that raise their dividend every year.
Life is expensive. And that’s more evident than ever. You need your money to grow over the long term to be able to keep up with rising costs.
Owning conservative, quality companies that generate gobs of cash flow and raise their dividend every year by a meaningful amount means that not only are you growing your income every year but, considering that stocks go up over the long term, you’re ensuring that your portfolio will grow, likely substantially.
Going back to 1937, including dividends, the S&P 500 (or a proxy for it before it was created) grew an average of 132% over rolling 10-year periods. But let’s compare that with the S&P 500 Dividend Aristocrats Index, an index of Perpetual Dividend Raisers that are members of the S&P 500 and have hiked their dividend every year for at least 25 straight years.
Since inception in 1990, the S&P 500 Dividend Aristocrats Index has never had a losing 10-year period. Its average 10-year return is 201%, which would triple your money with a one-time investment. That figure includes dividends.
Even if you exclude dividends, the index has still never had a losing 10-year period, even during the dot-com bust and the global financial crisis. At the end of 2008, near the bottom of the crisis, the Aristocrats were still up 9% – in price only – meaning these stocks held up a lot better than nearly all others.
Last week, I added more money to my dividend holdings. I’m not particularly concerned with where the market is going tomorrow or a few months from now. But I am extremely confident that 10 years from now, those funds will have grown substantially.
Having excess cash is certainly a nice problem to have, but it is a problem in that you need to do something with it. Consider the above ideas so that your extra cash isn’t sitting around like your neighbor’s kid doing nothing.