By Hunter Larson
Financial adviser
In years past, checking and savings accounts were great ways to invest excess cash and get a decent return without taking on much risk. As a result, there is presently quite a bit of dormant cash in these accounts. However, in today’s interest rate environment, money kept in checking and savings accounts is losing value as the interest paid on these deposits is not keeping up with inflation.
While it is smart to have some leftover cash to cover monthly expenses, it is important to realize that interest rates in these types of accounts are often minimal. For example, if inflation is 2 percent, and you are earning interest of 0.1 percent, your money sitting in the bank account will lose 1.9 percent of its value every year. Therefore, keeping a great deal of cash in these types of bank accounts may be better served in other investments. (A rule of thumb for how much one should have in a checking account is enough to cover one month of expenses. For savings accounts, the rule of thumb is three to six months of net pay for emergency funds.)
As an investor, you have multiple options for investing that money. If your current employer matches your 401(k) plan contributions, you should take advantage of that option first. Investing in a tax-advantaged account, such as a Roth IRA, or regular IRA account is another good option. Remember, you can only contribute $5,500 to an IRA each year, or $6,500 if you are age 50 or older. In addition to contributing to a 401(k) or an IRA, you can open a regular individual account which has no contribution limits, but does not offer tax advantages. For each type of these accounts, you can invest in a variety of investments, such as stocks, bonds, mutual funds and various other investment vehicles.
For investors that do not like to take on risk, an investment that can be used conservatively while still combating inflation is a regular certificate of deposit (CD) at your local bank, credit union or financial services company. CDs are a type of deposit that an investor makes to the bank, which are FDIC-insured up to $250,000 per account. In return, the bank gives the investor a specified interest rate on that money for a fixed amount of time. Once the CD matures, the investor will receive the principal amount that they invested in full from the bank. One drawback is that if an investor withdraws their money from the CD before the maturity date, there may be an early withdrawal fee. Competitive CDs today can get an investor over 1 percent in return, higher than current savings and checking account rates.
As inflation seems to be rising, it is important that your cash is earning interest to offset some of its effects. Money sitting in a bank account that is not earning much interest will decline in value as goods and services continue to inflate. Some of these strategies and investments are good ways to combat inflation and make your hard-earned money work for you. Be sure to consult with a financial professional and see if any of these options are right for you.
This is neither an offer to buy or sell the above-mentioned securities. Information contained herein is believed to be reliable, however; we can make no guarantee as to its accuracy or completeness. D.A. Davidson does not provide tax or legal advice. Please consult with your tax and/or legal professional for guidance on your specific situation. All investments involve risk. Past performance may not be indicative of future results.
Hunter Larson joined D.A. Davidson in 2015 as a research associate and successfully contributed to the IIG Research Team for more than a yearbefore accepting a position as financial adviser in Aberdeen.
