When starting a savings, investment or retirement account, one of the key decisions you have to make is how much of your money to keep as cash. A cash balance simply means the money is easily accessible and not tied up in an investment such as stocks. While cash savings don't generate significant returns, there are some advantages to keeping a sizable cash balance.
One of the first things you should work toward after getting a job is building a rainy-day savings fund. This is cash you set aside to cover extended periods of unemployment if you lose a job. Many young people transition into new jobs early in their careers. Having enough cash to cover your bills for at least six to 12 months helps you sustain yourself if it takes a long time to get a new job.
Easy Cash Access
In a May 2013 article in "The Wall Street Journal," financial planner Michelle Perry Higgins noted that you shouldn't invest money you might need within three years in a non-cash account. If you invest in products like stocks or currencies, you risk losing the money before you need it. Even if you don't lose it, non-cash investments aren't as easy to get to when you need the money. With a certificate of deposit, for instance, you only get a significant return by tying up your funds for at least a few years. With stocks, you may have to hold them for a while to gain returns.
A cash savings account is traditionally your safest investment. Federal banks are typically insured by the Federal Deposit Insurance Corporation up to $250,000 per account. This means your cash savings are typically safe. When you invest in stocks, you could lose some or all of your investment if the share price falls or the company goes under. Foreign currency trading is even more volatile. You could quickly lose your entire investment if you aren't disciplined. With a cash account, you may not gain much, but your money is usually protected.
From a long-term money management perspective, a large cash stockpile helps you avoid taking on debt. Often people turn to credit cards in lieu of cash savings when emergencies or impulse purchases come up. If you have car repairs, for instance, a large cash balance is nice to have. Otherwise, you could easily head down the long, winding and expensive road of credit card debt and interest payments.
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