What To Do With Money You Might Not Need Immediately

by Neal Frankle, CFP ®

You already know how to invest your very short-term money. Stick in the bank and don’t worry about the low return – the liquidity and safety are what you need.

And you know what to do with long-term money too. Use a long-term growth strategy that matches your goals and comfort level.
But what do you do with cash when aren’t quite sure when you’ll need it?

I received a call from an impressive young man yesterday that had this dilemma. He’s 27 and single. He has no debt and he’s saved $150,000 over the years. (Now you know why I say that he is impressive!) We spent for about 30 minutes on the phone and here’s what he told me:

a. He wants to invest the money for growth.
b. He might need a portion of this $150,000 to buy a house sometime in the future.
c. His job is stable but he’d like to have some liquidity.

What would you suggest our friend do? My idea was as follows:

1. Split the money up into 2 buckets. Put $50,000 in his emergency liquidity fund and earmark the remaining $100,000 for investment.
2. Manage the investment account for balanced growth (a portfolio of funds that included bonds and stocks) with a 50-50 split.

Why Keep So Much Liquid?money you dont need

It’s true that the $50,000 in the bank will provide close to no return. But it provides liquidity and opportunity. Since Jim has never tapped into an emergency fund, it’s very possible that he won’t have to touch that account. That means he’ll probably have that $50,000 available in case a great real estate deal comes his way.

Why Have Bonds in the Portfolio

With interest rates this low, this is a good question. The reason it’s smart for Jim to have bonds in his portfolio is because we don’t know when he’ll need the money and we can’t take the risk of putting all the money in the stock market. The bonds provide diversification and liquidity. They are not there to provide high return either.

I feel that some bonds are risky. But Jim can purchase bonds that have less risk quite easily.

Why Have Money In Equity?

Remember, Jim might need some of this money but probably not all of it. If he does need cash the money in the bank and bonds might be enough. Nobody knows if, when or how much money Jim is going to need down the line. Because of all this uncertainty, this approach is reasonable – and probably the best one out there. He has growth, safety and liquidity.

Do you think this is a good way for Jim to go? If you have money you aren’t sure you’ll need, would this be an attractive alternative for you? What might work better?

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