For the Money You Need Right Away
This may feel like putting your money under your mattress, but keeping some cash on hand is crucial for dealing with unexpected expenses. If you need money in a short timeframe, like a few days or less, here are two main options:
1. An FDIC-insured checking or savings account.
2. An NCUA-insured checking or savings account.
These options provide you with local branches you can visit if needed. Under normal market conditions, you’ll also earn some interest on your capital. Some savings accounts can reach 1.5% or more.
The term “FDIC-insured” is critical. The Federal Deposit Insurance Corporation insures your deposits up to $250,000 completely backed by the federal government in the event your bank fails. Without that, a bank failure would mean you lose your money. Additionally, checking and savings accounts at insured credit unions are also covered up to $250,000 by the National Credit Union Administration.
Alternatively, you could keep actual cash in an envelope or safe wallet, but that involves the risks of loss or theft.
For Money You Might Need in a Few Months
If you extend the time window a bit, you’ll have some additional options on your shopping list to keep your capital safe:
1. Short-term U.S. Treasury bonds that mature in 90 to 180 days, which you hold directly with the U.S. Treasury through a TreasuryDirect account.
2. FDIC-insured certificates of deposit that mature in 90 to 180 days.
3. FDIC-insured money market accounts (not to be confused with money market funds).
As with checking and savings accounts, the key factor is that your original capital investment is backed by the U.S. government’s guarantee, whether directly or through the FDIC. If another credit crisis occurs like the one in 2008, you want your capital to remain intact, even if your bank fails.
If you prefer credit unions, look for backing from the National Credit Union Administration (NCUA), the credit union version of the FDIC.
Note: The FDIC insurance applies to the total of all accounts in the same category that you hold with one institution, not $250,000 per account. For example, if you have a checking account and a savings account at the same bank, they will be insured together up to $250,000. Accounts belonging to different categories or held at different banks are insured individually up to $250,000 each.
For Money You Need in a Few Years
If you don’t need the money in the near future, your options become broader as you can incorporate fixed-income securities into your potential asset mix.
You should keep in mind that savings accounts and Treasury bonds can also qualify for this long-term category. For instance, you can obtain FDIC-insured certificates of deposit that mature in five years, offering you a slightly higher interest rate while maintaining safety guarantees.
Other options include:
1. Corporate bonds that mature on the earliest date the money is needed.
2. Municipal bonds that mature on the earliest date the money is needed.
3. U.S. Savings Bonds (Series EE or Series I).
4. U.S. Agency Bonds that mature on the earliest date the money is needed.
Note:
Foreign bonds or financial instruments denominated in foreign currencies should generally be avoided, as these instruments are not insured by the U.S. government.
The biggest risks in this category will involve sensitivity to interest rates, credit risk from the issuer’s financial health, and unexpected changes when you need funds. If you choose a long duration bond, you risk losing potential earnings if interest rates rise because you locked in at a lower rate. If you opt for a short duration, you may receive less interest than what is available at that time in long-term options.
It’s also good to keep an eye on expenses and taxes. If you are in the highest tax bracket, for example, the tax-free status of most municipal bonds is likely to result in more net cash in your pocket compared to a corporate bond that offers a higher yield. It’s important to use a calculator and calculate the after-tax equivalent yield.
Source: https://www.thebalancemoney.com/capital-preservation-portfolio-357164
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