You’ve no doubt heard that there is a lot of “cash on the sidelines,” both corporate and personal, as people wait for the most opportune time to leap into this highly volatile stock market.
My firm belief is that the time to invest is when you have the money and the time to sell is when you need the money. However, if you are one of those hoarding cash and are not comfortable investing in traditional assets, you may be wondering if there are alternatives to parking in a money market earning next to nothing. There are.
First, remember that good financial planning prescribes that you keep four to six months of living expenses easily accessible in a liquid bank account should the need arise. This is especially important now, when many folks are concerned about job security. If you have that need taken care of, and you still have some idle cash, consider the following.
Are you maxing out your 401K and IRA contributions? While these contributions would be considered market investments, they have the added potential benefit of a current year tax deduction, and earnings in these investments accumulate tax deferred. With the ongoing problems with Social Security, taking responsibility for your own retirement has never been more critical.
Consult with your tax advisor and 401k or 403B administrator on the maximum contribution you can make and when those contributions need to be made.
Another critical reason to max out your 401(K) or 403(B) contribution is that many employers offer some type of matching contribution. Whatever the match amount, this is “free” money to you that you can rely upon to increase your retirement savings.
Pay off high interest credit card debt. Carrying credit card debt is, in most cases, a bad idea. If you have balances and idle cash, this is a “no-brainer.” The interest rates are likely high, 20 percent or higher in some cases, and are generally not deductible, so there is no economic advantage to carrying a balance on these cards.
Should you pay down or pay off your mortgage? The answer to this is not as clear.
The interest on mortgage loans up to $1.1 million are generally deductible (check with your tax advisor), so if you pay taxes at a 30% federal marginal tax rate, and you have a mortgage at 5% interest, your after tax interest rate is actually 3.5%.
In this scenario, if you believe you can earn more than 3.5% in other investments (like the stock market), then paying off the mortgage may not be the best use of these funds. Consult your advisor to determine if this strategy makes sense for you.
Finally, if you have idle cash, then you may want to consider sharing your blessings with others. Many of our neighbors are in desperate need of food, shelter, and access to health care. It may be that investing in your community is the best use of your idle cash.
Charitable contributions may be tax deductible (consult your tax advisor for rules and limitations), and the feeling of helping out a neighbor in need is priceless. There are many local resources to help you decide which charitable organizations might be a good fit for you.
Please contact us if you would like to discuss any of these topics further.