Episode 39 Stash the Cash

20210330 Stash the Cash

Hello and welcome back to the podcast. Often in financial planning, we are planning for the future and managing finances can help you make that dream future a reality. But sometimes you have a need or goal and you’ll need pay for relatively soon, like in the next year or so? This may be for a house down payment, next year’s tuition, or to cover a gap in income while you take time off to care care of a newborn or right after retirement. 

 If you’ve got more than pocket change your saving, I recommend a bank. You don’t trust a bank? The Federal Deposit Insurance Corporation (FDIC)  insures your deposits up to $250,000 per FDIC-insured bank per person per ownership category. It covers checking and savings accounts, CDs, money market accounts. Single accounts and joint accounts are separate ownership categories.  More details at the FDIC. https://www.fdic.gov/deposit/covered/categories.html  You can split the money among more than one FDIC insured bank. Your deposits are insured up to the limit at each bank.

Checking accounts provide quick easy access to your money . Savings accounts usually pay more interest but have a limit of six withdrawals per month by law. There are exceptions, and withdrawals and deposits can be for any amount. 

 Would like to earn more interest? Then Certificates of Deposit (CD) or a Money Market Account may be for you. CDs are offered provide a specific interest rate in exchange for you agreeing to leave a lump-sum deposit with them untouched for a set amount of time.  At the end of the term they return your deposit with the interest to you. CDs are a good option when you know when you may need a set amount of money.  You can count on the guaranteed interest. Match the amount of the deposit and time to withdrawal to your future need.

Money Market Accounts are also offered by banks and credit unions, and generally pay higher interest rates than savings accounts. They often come with debit cards and check writing privileges similar to a checking account, but like savings accounts you are limited on the number of withdrawal you can make each month. If you think interests rates may rise, the money market account may earn more than a long term CD. If you think interest rates will fall, locking in a set interest rate with a CD may be better.

On thing I really want to stress here is that a Money Market Account and a Money Market Fund are NOT the same. A money market fund is an investment sponsored by an investment fund company. There is no guarantee of principal, that means you can lose money you deposit with them. And they are not insured by the FDIC.

For all these accounts, shop around. The interest rates offered by different banks and credit unions vary widely. Check out online banks. Because they don’t have costs like a brick and mortar bank, they often offer some of the highest interest rates. And some may offer incentives, or special features. If you have more to deposit than the $250,000 FDIC per person, per account limit, considering splitting up your deposit between more than one bank or credit union. And remember you’re not going to get rich on the interest these accounts earn and it will likely not even keep up with inflation, so they are not very good long term investments. The ARE safe places to stash your cash so that you can be sure that it is available when you need, no gut wrenching roller coaster ride.

Transcript

Kathleen Cannon: 0:10

Hello, and welcome back to the podcast. Often in financial planning, we're planning for the future. and managing finances can help you make that dream future a reality. But sometimes you have a need or a goal that you'll need to pay for relatively soon. So today, we're going to talk about where to stash the cash. First, let's take a step back and look at the bigger picture. I usually call this risk and reward. When investing money for the long haul, I often recommend taking some well thought out risks to try and get the more reward. One way to do this is investing in stocks through mutual funds. We say that stocks are risky, because their prices swing up and down. In return for taking on higher risk investors like you demand a higher potential reward. Historically, over time, this risk pays off by increasing the value of your investment. The risk you take is that on any given day, prices could go up or down. Sometimes drastically, that roller coaster ride down could come at a really bad time. If you need to tap that money right then and had to cash out while prices were low. You can even lose the money you put in. Some investments take smaller price swings and are less risky. They also tend to have a smaller return or profit over time. So what if you know you're going to need a chunk of change soon, like in the next year, so this may be for a house down payment, next year's tuition or to cover a gap in income while you take time off to care for a newborn or right after retirement. This is no time to be racing down the roller coaster. This is the time for old reliable, cold hard cash. So now back to our first question. Where do you stash your cash to keep it safe? Well, you could go old school and keep it in a jar in the pantry or stuffed in a mattress. Of course that's fine till someone raids the jar or the mattress goes up in flames. If you've got more than pocket change, you're saving. I recommend the bank. What's that you say you don't trust the banks? Well, turns out you're not the only one. The Federal Deposit Insurance Corporation or FDIC was established during the Great Depression. Today, the FDIC insures your deposits up to$250,000 per FDIC insured bank per person per ownership category. It covers checking and savings accounts, CDs, money market accounts, trust accounts, and IRAs. It does not insure stocks, bonds, mutual funds, life insurance policies or annuities. Single accounts and joint accounts are separate ownership categories. So let's say we've got Chris and Tracy and they open a joint account together, as well as separate individual accounts. They could have a total of up to $1 million insured at the same bank. Chris could have $250,000 insured in the single account and $250,000 of the joint account. Tracy could have the same the single accounts with $250,000 each and the joint account with $500,000 in it would all be fully insured. If this all sounds a bit complicated. The FDIC has a great website to help you answer the question. How are my deposit accounts insured by the FDIC? I'll put a link in the show notes. What if you have more money than that that you want to protect? Maybe you just sold your house and need to stash it safely for a while. You can split the money among more than one FDIC insured bank, your dues posit are insured up to the limit at each bank. Okay, so now you know where you can stash it. But you may have noticed that banks have options for your savings. How do you decide? Well, you're probably pretty familiar with checking accounts by now. They provide quick easy access to your money by cheque and usually ATM or debit card as well. This is handy for everyday cash, you can make frequent withdrawals and your deposits may even earn a tiny bit of interest as well. Savings Accounts usually pay more interest than checking, though the rates for both are well under 1%. Right now. savings accounts have a limit of six withdrawals per month by law. There are exceptions and withdrawals and deposits can be for any amount of money. So a savings account is a good place to park money for a while. But if you need a revolving door, go with a checking account. What if you want to be sure your money is protected, but would like to earn more interest until you need it. Then certificates of deposit called CDs, or money market account may be for you. CDs are offered by banks and provide a specific interest rate in exchange for you agreeing to leave a lump sum deposited with them untouched for a set amount of time. For example, they may offer a three month CD at one bank guaranteed for point one 5% interest that banks 24 month CD may pay point three 5% interest, you deposit the money with the bank, leave it there the entire time. And at the end of the term, they return your deposit with the interest to you. If you have an emergency and need to take all the money you deposit it out early. You can but there'll be a penalty. CDs are a good option. When you know when you may need a set amount of money. Like for a house down payment, a dream vacation or twice yearly tuition payments, you can count on the guaranteed interest just match the amount of the deposit and the time to withdraw to what your future need is. Okay, so what's a money market account. These accounts are also offered by banks and credit unions and generally pay higher interest rates than savings accounts. They often come with debit cards and check writing privileges similar to a checking account. But like savings accounts, you're limited on the number of withdrawals that you can make each month. money market accounts usually require that you maintain a minimum deposit amount to open and maintain the account. Unlike CDs, the interest rate on money market accounts can vary. If you think interest rates may rise, the money market account may earn more than a long term CD. If you think interest rates will fall, locking in a set interest rate with a CD may be better. One thing I really want to stress here is that a money market account and a money market fund are not the same. a money market fund is an investment sponsored by an investment fund company. There's no guarantee of principle. That means you could lose money that you deposit with them. And they are not insured by the FDIC. You can kind of remember this by thinking Hmm, the chance of losing money and a money market fund is no fun. Okay, so let's have a quick replay. Checking savings and money market accounts and CDs all guarantee that you will not lose the money you deposit. They pay a small amount of interest and there are insured against bank failure up To a certain amount by the FDIC these types of accounts are also offered by credit unions and are insured by the National Credit Union share Insurance Fund. In the same way that bank deposits are insured by the FDIC. Generally, ranked from the highest to lowest interest rates, they pay money market accounts pay the highest, then savings accounts, and the lowest since checking. Interest rates for all three vary over time. In contrast, rates on CDs are fixed, and you deposit your money for a set period of time, the longer you commit to the higher the interest rate for that period. For all these accounts shop around, the interest rates offered by different banks and credit unions vary a lot. Check out online banks, because they don't have costs like brick and mortar banks, they often offer some of the highest interest rates, and may also offer incentives or special features. If you have more money to deposit than the$250,000 FDIC per person per account limit, consider splitting up your deposit between more than one bank or credit union. And remember, you're not going to get rich of the interest these accounts are on and it will likely not even keep up with inflation. So they're not very good long term investments. But they are safe places to stash your cash so that you can be sure that it's available when you need it. No gut wrenching roller coaster ride. Well, I hope you found today's episode on stashing your cash useful. If you have any topics you'd like covered in a future episode, please reach out to me at Katie at money pilot advisor calm and we'll talk to you next week.