Hi, I'm Jimmy. In this video, we're looking at what we can do with cash today.
Since interest rates are so very very low. Perhaps this cash is something where we have to decide that
we're waiting for a good investment on maybe it's an emergency fund, maybe it's just sitting
in a savings account. Either way, what can we do with our cash today to ideally get our money
to start working for us. And since we all want our money to work harder for us. I thought it
would make sense to put together some of the best choices in today's low interest rate environment
for what we could do with cash. Okay, so let's jump right in. So let's start with the absolutely
worst thing we can do with our cash, and that is leave it in a checking account. Now I'm not
talking about the cash we need to pay our monthly bills, or even have a little extra cash on hand,
just in case you might need it at some point, that's logical that we should continue to do
either in a checking account or a savings account. I'm talking about keeping a decent amount of cash
in a checking account. And we really have no reason for it to be there.
This isn't a good move at all, because, unlike many years ago, where the average checking account
might pay a little bit of interest. Today it pays virtually no interest, and believe it or not,
this is a huge deal. Why we might ask, Well, that's because of inflation. So, roughly speaking,
inflation is how much the price of an average good or a basket of goods goes up in a single year.
So, this is a chart of inflation, going back the past 20 years and over this time period, the
average inflation rate has been a bit over 2%. So that means that if we had $10,000 in cash. Well,
next year, we'd be able to buy about 2% less taking the average inflation rate,
be able to buy about 2%, less than we can today. So, if we had $10,000 we'd actually have to add
200 additional dollars, which is 2% of $10,000 200 additional dollars to our account,
just to maintain the same buying power. Now, even if we wanted to go with the current most recent
inflation rate number. Well, that was 1.4%. Well, we still have to add $140 at the end of the year
just to maintain our current buying power with the $10,000 that we have. So either way
this is a bad thing because we're essentially just throwing that money out the window. So,
for the sake of this video just to keep the math simple, we're going to just use the 2%
average inflation rate and pretend like that's the inflation rate we're going to get. Now,
going back to our list here well after a checking account the savings account,
which is the most popular place for people, or at least Americans to put their cash. Well,
the savings account. On average brings in about one 10th of 1% slightly less than that,
on an annual basis, so that's still way off the 2% that we need to earn, just to break even so
sticking with our same $10,000 in cash example. Well, if we had that $10,000 in a savings account,
and a 2% inflation rate. Well, instead of having to come up with $200 a year to maintain our buying
power. Well, thanks to our savings account, we'd have to now come up with $191 per year,
which is better sure but not much better. And I'm sure we all understand that this is crazy tough,
given how low interest rates are today. So on one hand, low interest rates makes buying houses or
cars, or even borrowing money in general, much cheaper, but for those who have money saved,
anybody who's sitting on cash, low interest rates are killer. Now, even if we were to shift over to
something like a certificate of deposit or CD for sure. Well, according to bankrate.com. They
are claiming that the average one year CD pays just 41 basis points, so about four tenths of 1%.
And with that CD, you have to lock up your money for one year. So we have to lock up your money for
a year, and we're gonna get less than a half of 1%. Once again, with inflation adds 2%,
assuming our $10,000 we still have to cough up $159 a year we have to add to our account, just to
keep the same buying power. So, CDs don't really cut it today I. Okay, moving right along. So next
up we have the high yield savings account, and actually think this is one of the better choices
on the list there are no real great choices, given how low how extremely low interest rates are.
So the first one that could be worth considering is Marcus by Goldman Sachs, and they pay 60 basis
points, and that's yes the highest one we have so far. So that could be good for many people, since
it really offers the flexibility of your typical savings account, but a much higher interest rate,
another good option is and they have the same interest rate is the American Express high yield
savings account. Once again, it offers the same interest rate, and it offers the flexibility of a
somewhat typical savings come so that can be good. But, sticking with our $10,000 in cash. Well, we
still have to throw away, $140 a year, she has to keep the buying power. So although this is good,
it's not great. Okay, now moving over to one that could make some sense for many people. Now
one option is to just invest in the stock market, but the issue there is that if we need this cash,
let's say as an emergency fund. Well we have no real way of knowing what the return will be
in stocks. So that can be very dangerous COVID as an example COVID happens at the start of 2020,
we have all our money in the stock market, stock market crashes right around the same
time we need that cash, so I'm not sure stocks for a for an emergency fund is a very smart move.
With that being said, what could make much more sense is to consider putting our money into bonds
to illustrate just one potential choice. Well I found this Johnson and Johnson bond.
And this one was issued with a coupon rate of almost 6% I actually think was 5.95%,
but that was back when the bond was issued which was in 2007 and interest rates at that point we're
clearly much higher than they are today. And since interest rates have fallen, well the price of the
bond has gone way up. And that's an important relationship for us to remember when interest
rates, fall, the price of the bonds go up, if interest rates go up the price of the bond will
go down. So instead of buying this bond, back when was first issued for, let's say, 100. Well,
now it's trading at about 155. So paying a much higher price, but we are getting a much higher
coupon rate of almost 6% so for curious if we were to pay the current price for this particular bond,
what we would end up with, with what they call is a yield to maturity and that yield to maturity for
us, would be about 2% at the current price, which by coincidence, is about the same inflation rate
that we're looking at. So in theory investing in this bond allows for us to maintain our buying
power for however long we hold this bond. Now they call it a yield to maturity because it is soums,
that the price of the bond, which is at $150 right now. Well 156 I believe 155 some somewhere in that
area. Well, the price will gradually drop down to the hundred where you where it will be when
the bond matures, but we're collecting much higher coupon payments, every six months. So,
our overall yield ends up being about 2% based on today's price, and if we're curious, the maturity
for this particular bond happens in 2037. Now, this doesn't mean that we have to hold this bond,
all the way until 2037, we could sell if we wanted to, let's say we had invested in this bond and the
next year for some reason we need the cash, we can sell the bond. But the advantage of holding the
bond until maturity is that you know what you're going to get to maturity. We don't know what the
price of the bond is going to be in six months or a year or something along those lines. But if this
cash is cash we're just sitting there waiting for an opportunity or keeping just in case,
investing in a bond could make sense. Now I do want to point out that investing in a bond is not
the same thing as investing in a bond ETF. ETF issuer for exchange traded fund.
Yes. Bond ETFs generally are less volatile than let's say a stock ETF, but because there is no
maturity. Well, that the price of that ETF is much more vulnerable to the whims of the market.
So if we were to decide to invest in this bond we were going to hold it to maturity, but we
know exactly what we're going to get, of course, assuming Johnson and Johnson stays in business,
and continues to pay their bond. Well, assuming that's the case we know what we're gonna get we
know we're gonna get at the end, it's all pre laid out for us. Unlike a bond ETF, so I wouldn't use,
we could do a bond ETF if we're willing to deal with a bit more volatility than a standard bond,
but don't make the mistake of assuming they're the same thing. And when we switch back to our
list here. Well, I recognize that there were very few good choices for what to do with cash during
this time period. The real question in my mind is how long are they going to keep interest rates
low. I personally think they're probably going to stay here for a while. If that's the case, then
I'm not sure it makes a ton of sense to sit there just waiting. Wait, and hold cash and continue to
let that cash lose value, especially since just recently the Federal Reserve has come out and
said they're willing to let the average inflation rate begin to go up a little. So that half, if
that were to happen. Well that would make the need to be smart with our cash, even more important.
The average inflation rate begin to go up a little. So that half, if that were to happen.
Well that would make the need to be smart with our cash, even more important. That being said,
I know that there are many people who are not too familiar with bonds
bonds are not a talked about as often as stocks are. And I actually did a video.
This year earlier this year, or run through the basics of investing in bonds.
So if you're curious perhaps that could be a good next video for you to watch. I got a link right
here I got a link in the description below and thank you so much for sticking with me all the
way to the end of the video. I really appreciate it. Thanks and I'll see in the next video.