Now that the Federal Reserve has signaled that they intend to drop rates, is cash now trash again? If so, where should I park my money if I need it in 3 – 5 years? This is a clip from one of our Q&A livestreams.

Want to know how much you should be saving to achieve your financial goals? Check our our FREE “How Much to Save” resource!

Since 2009, while cash was yielding next to nothing, the S&P 500 annualized over 15%. Out of those 12 years, the S&P 500 has only been down in one of them (and only lost 4.41%). If you started investing in 2009, you might think the stock market only goes up. And you’d probably wonder why anyone keeps anything invested in cash, as the S&P 500 has not been down for a significant period of time. Is the opportunity cost of keeping your emergency fund and other short-term savings invested in cash greater than the safety and security of your money? In today’s market, what is the value of cash?

The importance of cash

It is easy to forget why cash is important and why it makes sense to save for short-term goals (less than five years in the future) in cash. Especially in times when the stock market is doing great and cash is not, the safety and security of keeping money in cash seems to pale in comparison to the opportunity cost of not investing that money.

The stock market is pretty predictable over the long-term, but much less predictable over the short-term. The S&P 500 is positive in about 95% of rolling 10-year periods, and positive in 100% of rolling 20-year periods. However, over one-year periods, the S&P 500 goes down 25% of the time, and over five-year periods the S&P 500 has a one in eight chance of being down. The chart below, from Fisher Investments, shows the relative unpredictability of the market in the short-term, and predictability over the long-term.

If you are investing for the long-term, unpredictability over the short-term is fine. A down year, or even a down five-year period, shouldn’t have much of an impact on a young person saving for retirement. But what if you have your emergency fund invested in the market? The S&P 500 is down in 37.2% of all months and in 31.3% of all quarters. An emergency fund needs to be liquid and there when you need it. It is very risky to accept a 30% to 40% chance that your emergency fund won’t all be there when you need it. The true risk may be even higher since negative events usually happen all at once (when the market is down, you may be more likely to lose your job and need to access your emergency fund).

The risk of investing money saved for short-term goals, like a house downpayment or car purchase, are not as great as keeping your emergency fund invested, but still high. Are the returns you can make in the market for a couple of years really worth the risk of delaying a home purchase or car purchase? Shelter and transportation are necessary expenses, and while you may have acceptable substitutes while you are saving, there is a reason why you are saving for a new car or house; your current home may not be big enough to meet your needs, or your car may be on its last leg.

Cash-equivalent accounts aren’t exciting. Nobody enjoys seeing their emergency fund earn $5 per month in interest while watching the S&P 500 reach new highs what feels like every day. The feeling of missing out on growth is the price we pay for our short-term savings to be safe and accessible when we need it. The goal of short-term savings is not to maximize growth, but to ensure it is there when we need it, whether it is for emergencies or to buy a new house.

Cash won’t always yield nothing

When looking at the effective federal funds rate† over the last 65+ years (see the chart below), the last decade appears to be an anomaly, not the norm.

Throughout the 1990s rates mostly hovered around 5%, and in the 1970s and 1980s rates went as high as 10%, 15%, and nearly 20%. It’s probably difficult to imagine earning 5% or 10% interest on a savings account, especially for generations that have never experienced higher interest rates, but if history is any indicator we could very well experience higher rates in the future. At the very least, interest rates are unlikely to remain near zero long-term; officials at the Federal Reserve have said rate hikes could come by 2023, and aim to achieve “moderate” long-term interest rates.††

Alternatives to cash

So far we’ve only compared cash-equivalent accounts to the stock market, but there are alternatives to cash-equivalent investments that aren’t as risky as investing in the stock market, such as bonds and CDs. While these accounts aren’t as risky as the stock market, they still come with significant drawbacks when compared to cash-equivalent investments. Bonds aren’t as risky as stocks, but can still go down in value. With CDs your money is typically locked up for a period of time and the interest rate you can get is not significantly better than you would get on a savings account.

There are cryptocurrency “savings accounts” out there that promise extremely high interest rates, in some cases 12% or more, but these vehicles are very risky and largely unregulated. Your money in the account is invested in crypto, not cash, and is not protected by the FDIC. There are “stablecoins” that are pegged to other assets to prevent price fluctuations, but they don’t always work. SafeDollar recently plummeted to zero, despite being a stablecoin. High-interest cryptocurrency “savings accounts” and stablecoins sound like a great idea in theory, but are, at least for now, unregulated and very risky (and may work against your ultimate goal of serving as an emergency reserve for a financial rainy day or upcoming expense).

Why cash is the safest option

There is no great alternative to cash that is just as safe and secure and pays a reasonable rate of interest. One of the basic rules of finance is that you must increase the amount of risk you are willing to take if you want to increase your potential return. Savings for short-term goals, like buying a house or car, and your emergency fund, need to be readily accessible and not go down in value. Cash can also be an opportunistic tool that allows you to buy when the market is down. Check out the clip below where we discuss the importance of cash and having an adequate emergency fund.

Cash-equivalent accounts may not pay much interest right now, but they provide safety and security that riskier investments just can’t offer. When the market is down and you need to access your emergency fund, you’ll be glad it is safe and sound in a boring savings account.

Notes

† The federal funds rate is the interest rate banks charge each other to borrow or lend excess reserves. This rate plays a large role in determining the interest rate on your savings account, on your mortgage, and more. When banks are getting a higher rate lending your money to other banks, they are able to pay you a higher rate for your deposits (and mortgage rates are higher when banks can earn more through other activities).

†† The Fed defines “moderate” as 2% inflation, and this is an average target, not a ceiling. This means if inflation is below 2% for several years, the target may be higher for a few years to bump the average up to 2%.

Hey Money Guy Show Family! Cash is making money again. That’s right. Times are changing and you can generate income from cash again. (Seriously)

The Great Recession (2008-2009) slashed interest rates and they were in a free fall sitting on the bottom at 0.5% for the better part of a decade. Now, cash is making a comeback and it can yield over 2% today in high-yield savings accounts and over 2.5% in a 1-year CD and 3% for longer term CDs.

We’re at the point now where we all should start paying attention to cash as an asset class that can yield a return and what you can do about it.

Here’s What You’ll Find Out in this Episode:

• CD rates from 1984 to 2016 as reported from Bankrate
• Why Brian is like Carrot Top?
• Checklist to see what you need to do with your cash emergency reserves:
  • Pull your bank statements to see what you’re being paid (hint: if it’s less than 1% you’re not earning enough)
  • FDIC-insured money markets are well over 1.5%. Get it!
  • Don’t just think about FDIC-insured money market accounts. Look at your brokerage accounts, too. Your default cash holding account may not be yielding enough.
  • Re-evaluate what you’re keeping in cash reserves and how you look at cash. Prioritize your cash and make it work. Start with $1,000 first and then get to 3-6 months of cash reserves saved.
  • Maximize interest rates without falling prey to bait and switch. So do your research and make sure the FDIC-insured accounts are more than introductory rates.

Resources Mentioned in this Episode

• Use resources like Bankrate.com to check rates and FDIC-insured status

Tune In and Go Beyond Common Sense with the Money Guys

This show would not be what it is today without the support of our wonderful listeners. We strive to continue making the show better and your feedback is an important part of that process.

If you have any questions/suggestions/comments/concerns (or just want to say hi!), feel free to reach out to us: brian@moneyguy.com and bo@moneyguy.com. You can also join the conversation on Facebook or connect on Twitter @MoneyGuyPodcast.

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In this week’s episode of The Money Guy Show, we’re doing just that! We are peeling back the curtain on the worst possible mistakes you could make with your money so that you can hopefully avoid making them in your own life. Heed the warnings of those who have stumbled before you so that your path to financial independence can be smoother sailing.

Here’s what you’ll learn in today’s show:

• What ‘not-to-dos’ in your 20s that have the biggest ripple effect on your future finances
• Why not taking these risks at the beginning of your adult life may come back to haunt you later
• Which investment vehicle you should prioritize getting your money in as early as possible
• How many hours you need to build up enough ROI-producing expertise in your career
• The debt you need to keep in-check for it to deliver the highest value in your financial life
• Why you don’t want student loans to exceed 8% of your gross income
• The biggest mistakes you could make in your 30s
• How divorce can impact your personal finances
• The questions you need to ask yourself in your 30s because if you ask them in your 40s it may be too late
• Why carrying these types of insurances are necessary
• How to avoid the trap of complicated finances because you think it’s part of adulting
• Why owing leads to a cycle of faking financial success and delays your actual financial success
• Why you can’t afford to procrastinate in these areas of finance any longer
• The responsible thing you may be doing that can derail your financial security and how to prioritize appropriately

Resources mentioned in this episode:

• https://www.mappingyourfuture.org/paying/debtwizard
• http://yourdivorcequestions.org/how-will-divorce-affect-me-financially

Tune In and Go Beyond Common Sense with the Money Guys

This show would not be what it is today without the support of our wonderful listeners. We strive to continue making the show better, and your feedback is an important part of that process.

If you have any questions/suggestions/comments/concerns (or just want to say hi!), feel free to reach out to us:  brian@moneyguy.com and bo@moneyguy.com. You can also join the conversation on Facebook or connect on Twitter @MoneyGuyPodcast.

If you enjoyed this episode, be sure to join our community! You’ll get immediate access to 15 of our most recent shows, plus you’ll get future podcasts delivered straight to your inbox so you can get in on the action right away.

Black Friday is coming and we want to prepare our listeners to be judicious spenders and maximize your hard earned dollars this holiday shopping season. In this episode of The Money Guy Show, we walk you through how to avoid the Black Friday gimmicks and get the greatest bang for your buck. Hold on tight, because we cover a lot of ground in this fun segment of our podcast. 

Being a ‘Retail Rambo’ on Black Friday means that you’re zeroed in on the right deals and incentives to save an extra 3% to 20% more than other shoppers out there. It also means that you won’t be lured or fooled by the illusion of big savings that don’t really exist. If you’re a fan of The Money Guy Show, chances are a saver first and spender second. Well, just like we encourage forced scarcity and moderation when it comes to consumption, we carry these same principles with us on Black Friday. We want to make sure your money is stretched as far as it possibly can to get the greatest value for the items on your holiday wish list this year.

Ready to save big this holiday season? Here’s what we cover in today’s packed episode:

• How to spot a Black Friday scam and avoid it
• Understand retail tricks and determine which ones are worth your time
• What needs to be in your shopping ‘tool belt’ this shopping season to save big
• What “Off Brand Clowns” are and why you should be wary
• Door Busters: Good deals or just bait?
• How to know how much you’re actually saving (despite what the shiny sticker says)
• Price steering and price targeting: What you need to watch out for
• Must-have research tools to help you compare product prices across multiple retailers
• The 3-step online shopping strategy that offers you a triple plan of attack on the best deals
• In-store savings strategies that work to save you even more money
• How to most efficiently spend your money this holiday
• Ways to effectively leverage credit this season for more savings

Resources We Mention in this Episode:

• pricegrabber.com
• cnet.com
• fatwallet.com
• dealcatcher.com
• ebates.com
• consumerreports.org
• tgiblackfriday.com

Tune In and Go Beyond Common Sense with the Money Guys

This show would not be what it is today without the support of our wonderful listeners. We strive to continue making the show better and your feedback is an important part of that process.

If you have any questions/suggestions/comments/concerns (or just want to say hi!), feel free to reach out to us: brian@moneyguy.com and bo@moneyguy.com. You can also join the conversation on Facebook or connect on Twitter @MoneyGuyPodcast.

If you enjoyed this episode, be sure to join our community! You’ll get immediate access to 15 of our most recent shows, plus you’ll get future podcasts delivered straight to your inbox so you can get in on the action right away.