Is cash an investment?
Earlier this week in my newsletter, I talked about cash being an investment (P.S. click here to sign up for my newsletter to get free content).
A few readers wanted me to expand on idea so this post was born.
Cash is one of the most underrated investments of all time. In fact, Seth Klarman (one of the best investors of all time) regularly holds a significant portion of his portfolio in cash.
Let’s talk about why cash is really a *smart* investment and why many investors should own ditch their old banks and get a high yield savings account.
I really hate to sound so cliche here, but it is important to have a rainy day fund. You never know when you might lose your job or when the market might crash next.
Take it from someone with personal experience here: it sucks to have to sell shares at bad prices just to pay for an unexpected item.
A cash cushion will save you a lot of headaches down the road. Make sure you have at least 6 months of living expenses in cash.
One of the main reasons why I have a big cash holding right now is the valuation of the markets. I just haven’t seen anything very cheap so I’ve been on the sidelines so to speak.
As Charlie Munger has said, doing nothing and sucking on your thumb is the hardest part of investing. If you don’t see any good investments don’t try to force something.
It’s much better to have cash sitting on the sidelines doing nothing than to lose 20%+ on a bad investment.
Another reason so keep a healthy amount of cash on hand is to take advantage of pull backs. I remember when I had cash back in 2011 when S&P downgraded the U.S. credit outlook.
The markets fell by 5% that day (a huge move) and I was able to scoop up some shares at very attractive valuations.
That’s the big benefit of cash. It allows you to take advantage of volatility in the markets when they arrive. With the markets at all time highs, it would be a smart idea to have extra cash on hand when it inevitably crashes!
Benefits of high yield savings accounts
So, one of the biggest gripes people have about holding cash is the lack of return. To tell you the truth, I’m not even sure what I’m earning in my Wells Faro savings account. However, I’m pretty sure it’s less than 0.1%.
That’s why I have been a big proponent of having your cash parked away in a high yield savings account. Many internet banks offer great high yield savings accounts and a lot of other awesome perks.
Internet banks don’t have a lot of the same infrastructure as traditional banks. They don’t have tellers and they don’t have physical retail locations. As a result, they can offer much better savings account rates for your wallet.
The national average interest rate on savings accounts in the U.S. is around 0.12%. In contrast, many online banks currently offer rates ranging from 1.2% to 1.5%!
That’s right…you can easily earn 10x the interest just by parking your money in a high yield savings accounts!
The other great thing about online banks is the debit card. Many of them reimburse you for ATM withdrawal fees.
As a result, it is a very handy tool to use when you’re traveling out of the country (where you can sometimes pay $20+ to withdraw money).
Best high yield savings accounts of 2018
Here are the 7 best high yield savings accounts of 2018:
Synchrony currently offers a 1.3% high yield savings account.
There are NO minimum balance requirements or monthly service fees.
Click here to open up your Synchrony Financial high yield savings account for free!
Ally Bank currently offers a 1.25% high yield savings account (interest is compounded daily!)
There are no monthly maintenance fees or minimum balance requirements!
Click here to open your Ally Bank high yield savings account for free!
Marcus by Goldman Sachs currently offers a 1.4% high yield savings account.
It only has a minimum account balance of $1 and they do not charge transaction fees!
Click here to open up your Goldman Sachs high yield savings account for free!
Barclays currently offers a 1.3% high yield savings account.
There are no monthly maintenance fees or minimum account balances!
Click here to open up your Barclays online savings account for free!
CIT bank currently offers a 1.55% high yield savings account.
There are no monthly maintenance fees. However, the minimum account balance is $100.
Click here to open up your CIT Bank high yield savings account for free!
The fed raising rates
With the fed raising rates over the past year (and for the foreseeable future), interest rates on high yield savings accounts could go higher.
Currently, my Synchrony Financial high yield savings (HSV) account earns 1.3% interest. A year ago, it only earned 1.2% and before that, it was at 1.0%!
Now, one thing to keep in mind is that many smaller (and cunning banks) may offer higher rates to induce people to deposit in their accounts. They might offer something like 1.5% or 1.6%.
However, a six months later or a year later, they might reduce that down. So watch out for any unscrupulous activity like that!
Should you get a high yield savings account?
Overall, I think that everyone should get a high yield savings account. The interest rates on traditional savings accounts are incredibly low and laughable.
While a high yield savings account won’t make you rich, it is an easy way to 10x your interest income on excess cash. Plus, most of them offer that nifty ATM card that reimburses you for pesky ATM transaction fees!
Even if you aren’t fully invested in stocks, real estate, or mutual funds, your cash should be earning money for you!
Readers, do any of you have high yield savings accounts? If so, which bank do you roll with and why? Let me know in the comments below!