I have a mountain of cash. I know I should probably be doing something better with it. But what?

Do you have a goodly amount of money, but it’s all sitting in cash? Maybe you’ve gone so far as to put it into a high-yield online account, but still, it’s making at most 1.5% interest each year?

This is pretty common with people who seek me out. Maybe that big pile o’cash has accumulated because you think “I don’t have an overall strategy for my money, so I’m scared to do the wrong thing with it. But I know saving is a good idea!”

You might also be thinking, “The stock market is so high! I know I should probably invest some of this cash, but I’m afraid the stock market is on the verge of tanking.”

Let’s talk about those two concerns and make sure that cash is doing what it should be doing for you.

When Cash Is Exactly The Right Thing

Sometimes, that cash is Exactly The Thing You Need. Cash is what you need for short-term goals (anything that’s happening in the next 2-3 years) and your emergency fund.

If you have some big life transitions happening in your near future, cash is your best friend. I have plenty of clients who are planning to do Big Things in their lives over the next year: moving to another state, going back for an MBA, taking a 3-month sabbatical on a mountaintop in Utah. 

They absolutely want to have a big pile o’cash to make those transitions easier and safer. In other words, you’ve done Exactly The Right Thing! Congratulations!

What to Do with the Cash You Keep

If you do need cash in your life, make sure it’s at least getting a (relatively) good interest rate.

Even though interest rates have started to rise, some banks and brokerage firms are still offering pathetically low interest rates. According to Jason Zweig (a personal finance journalist I really enjoy), many big institutions are giving interest rates well under 0.1%. Whereas if you look on bankrate.com–my go-to site for finding places to stash cash)–you can get a 1.75% interest rate at CIT Bank (FDIC insured) as of today!

[Edited 8/11/2022: Over the years, I’ve become less emphatic about optimizing interest rates. Sure, it’s great if you can get more “free” money by getting a higher interest rate. All else equal, go for it! But getting a higher rate often comes at a cost: time, hassle, irritation. By far the most important thing here is simply Having The Cash. If it ends up staying in a no-interest checking account…fine.]

Sometimes You Need to Invest That Cash

Let’s say you’re looking out over the next few years of your life, realizing, “Yeah, I need some cash, but not this much cash. What should I do with the rest?”

That’s where A Plan comes in real handy. A Strategy. A Grand Vision of what the heck you want your life to look like.  And don’t worry, it is a rare person, especially a rare 30- or 40-year-old who knows their “goals,” per se. SMART goals might be helpful in a business context, but life–and our minds–are pretty unpredictable. Oftentimes we don’t know what we want until <boom!> we want it.

I know that in my world, I meandered through the tech industry for 10-ish years, living in San Francisco, dating around, not really knowing what the future held. And then <boom!> found a smart guy, got married two years later, had a baby two years after that, changed careers, went back to school for a Masters, had a baby, cross-country move, had another baby, another cross-country move with a 3-month road trip, bought a house, and started my financial planning firm. And I can assure you, I really didn’t anticipate doing any of this stuff more than a year in advance.

So, shaped by my own experiences and also by what I observe with most of my clients, I like to plan around intentions and values and flexibility, less so than the traditional “goal.” Thinking about Goals (capital G) usually stops people dead. Ask them, however, what’s important to them, what their ideal Saturday morning is, what they would do tomorrow if they had Bill Gates-level money…now you’re getting at the good stuff.

Whether you know exactly what your goals are, or you just know your life will change in unanticipated ways,  we know we’re going to need money in the future, and we can save and invest towards that future.

How to Invest Your Cash And Not Feel Too Nervous About It

I get it. The stock market has been on a terrific ride for, damn, 9 years now (almost to the day). And that “little hiccup” the stock market had back in February did scare a bunch of people (including advisors, to be sure).

I find that talking about investing in “buckets” has helped my clients feel comfortable about putting money into the stock market now, even if they fear (know) it’s going to fall at some point.

A “bucket strategy” is pretty common when it comes to investing in retirement, but I find the same general idea is really helpful in wrapping our minds about investing when we are Very Far Away From Retirement.

Here’s how it could work (and, in fact, how I do it with most of my clients):

Step 1. Figure Out Your Buckets

You have, say, 3 time frames you want to save and invest for:

1. the next 3 years (sabbatical! Buy a house!)
2. 3-10 years from now (I have no idea! But i know that lots of things happen in my 30s and 40s!)
3. 10+years (“work optional”)

Step 2. Put the Right Accounts in Each Bucket

You can set up your savings and investment accounts to fall into those 3 buckets:

1. Next 3 years: Bank accounts for the next 3 years.
2. 3-10 year bucket: A brokerage account (a normal, non-retirement investment account at Vanguard or TDAmeritrade, for example) for those 3-10 year goals. Some of your excess cash can go here.
3. 10+ years bucket: A 401(k), an IRA, and yet another brokerage account for those 10+ year goals. Some of your excess cash can go in this brokerage account, too.

So now each account you have has a single purpose. You don’t have one investment account that is for both whatever happens in 5 years and your retirement. How the heck could one easily invest that for such wildly different time frames?

This is not the only way to invest effectively, but I find that people can grok “oh! All the accounts in this one bucket are for retirement. And so we’ll invest them all the same way.” And one of my cardinal rules of investing is to keep it simple and understandable. This mental framework helps people do just that.

Step 3. Invest Each Bucket

Now that we’ve gotten your money situated in the right bucket, we can easily invest it appropriate to the time frame.

1. Next 3 years: Cash, of course
2. 3-10 years bucket: Well, let’s invest that conservatively. Maybe 30% stocks and 70% bonds. That really limits how much that particular bucket of money can lose when the market crashes.
   If the stock market loses half its value (it’s certainly happened before), maybe this account loses 15% of its value. Not pretty, to be sure, but a hell of a lot more palatable than fearing it could lose half its value. Which hopefully makes it easier emotionally to actually invest the money in the first place.
3. 10+ year bucket: Let’s invest that more aggressively. Maybe 70% or 85% stocks. Sure, when the market crashes, this bucket is going to lose more money. But you now know that you don’t need any money from this bucket for at least 10 years, so it is (or at least should be, that’s the hope!) easier for you to stomach losses in that bucket. Or, if my dreams came true, you’d just ignore it entirely.

So, there you go: your pile of cash might just be exactly what you need. But if it’s not, then you have to know what you need money for (it can be vague) and then, yes, you need to invest it. Otherwise, that pile of cash is going to become less and less capable of giving you the life you want.

Are you sitting on a pile of cash, and you want to make the most of it, but you’re not sure how to go about it? Reach out and schedule a free consultation or send us an email.

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Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.