Day 9: Get Maximum Mileage from your Cash Holdings
Degree of difficulty: Easy to moderate
Everyone needs cash, both for an emergency fund (see Day 8's tip) and to cover upcoming expenses such as your property insurance or your offspring's university fees. Keeping that money safe is important, but the big drawback is that yields on savings accounts, money market accounts, and other cash-like vehicles are about as low as they can go right now.
When shopping for the best yields on cash investments, the list of don'ts is almost as long as the list of dos. While it's smart to be opportunistic and scout around for the best yields, my key piece of advice is not to get too cute. Safety is key for this portion of your portfolio, so resist the temptation to park some or all of your assets into a "cash-like" vehicle that offers a higher yield but also a greater risk to your principal. Ultrashort-bond funds and bank-loan funds are a great example of why you shouldn't chase yield: Although some investors had used funds in both categories as a higher-yielding money market substitute, the average fund in these groups lost 8% and 30%, respectively, in 2008's flight to quality.
Though certain cash deposits tend to offer higher yields than money market funds and other cash-like vehicles, the big drawback is that you're locking yourself into a fixed rate. Money market fund managers, by contrast, can swap into new, higher-yielding securities if rates move up. Many of the most dependable money market funds have very low expense ratios, which in turn enables them to deliver above-average payouts relative to their peers without taking on a lot of extra risk.
Return to the article: "The 30-Day Financial Fitness Plan".
