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My advice is always to have cash working hard but to keep it safe. Let me offer a couple of solutions for your dollars.
A critical way to begin is to avoid these two common mistakes: greed and laziness. Let's start with greed. I see so many people making foolish decisions in the pursuit of more income — sometimes called reaching for yield. These investors will buy a high-yield bond or high-yield bond funds to get those high yields. But these bonds are also known as junk bonds, and for good reason. They have ultra low credit ratings, which makes them vulnerable to default when the economy turns down. Junk bonds are not only more volatile than high-quality bonds, but they tend to plunge when stocks do — exactly the opposite of what you expect from bonds. In 2008, for example, stocks tumbled 37 percent, and high-yield bonds fell 26.2 percent.
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Junk bonds aren't the only investments that disappoint when people reach for yield. Those who bought high-yielding energy-limited partnership funds in 2015 watched them blow up, losing an average 34.8 percent — including reinvested dividends.
On the opposite end of the spectrum are individuals who leave huge sums of money in their bank or investment accounts earning well under 0.25 percent annually. After taxes and inflation (currently at 2.1 percent a year), that's just giving money away. So consider these two options:
Stash your cash in the right places
According to the Federal Deposit Insurance Corp. (FDIC), as of Jan. 27, 2020, the average interest checking account paid only 0.06 percent annually. Bank savings accounts yielded 0.09 percent, and bank money market accounts yielded slightly more, at 0.16 percent. For each $10,000, you earn only between $6 and $16 a year.
Some banks and credit unions pay far more. I regularly look at sites like DepositAccounts and Bankrate. These show some banks and credit unions paying 2 percent or more, which equates to $200 a year for each $10,000. Make sure you are stashing cash in a bank or credit union backed by either the FDIC or the National Credit Union Administration (NCUA), both government agencies. There are some institutions that offer higher rates, but those investments are not backed by the federal government. Stashing cash in these falls under the category of greed, mentioned earlier, which may result in your losing some or all of your principal.