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