Q: I was visiting a friend recently and discovered that she keeps significant amounts of cash in a cereal box in her cupboard. I'm incredibly curious why, but more importantly, I want to get her to invest it or at least get it in the bank. Any advice? — Eunice, via email
A: Eunice, that is really something to chew on! (Sorry, I couldn't resist.). I've not run into something like this before, and it sounds like you haven't either. I'm trying to think about why a person would keep large amounts of cash in their home. I'm assuming by "significant," we're talking about in excess of $1,000?
Does she have a side business where she is paid in cash, or where she pays her employees that way? Does she visit the casinos regularly? I applaud your desire to get her to invest or at least save it using a more secure institution than Cap'n Crunch's Credit Union. I'm sure there are some people out there who simply don't trust banks. I'm not sure why, but I'm familiar with the paradigm. And honestly, with the returns on a savings account these days, it may not be a big deal with regard to interest. My concern would be loss. The house could burn down, the dog could eat it, the kitchen could flood, the house could be robbed, etc. In a bank, that loss is insured up to $250,000. In a box of Apple Jacks, there's no way to recover that money.
If you feel like you know her well enough, it wouldn't hurt to ask why she keeps the cash around. You might learn something that will help you overcome whatever her obstacle is and help her make sound financial choices instead of relying on the current investment in whole grains and miniature marshmallows.
Q: Is there any reason not to take advantage of the higher rates offered by CDs, instead of just putting my money in a savings account? — Merl, at a presentation
A: Merl, certificates of deposit (CDs) are a viable savings tool, and they do offer a minimally higher interest rate over regular savings. But the reason that is true is that the financial institution is virtually guaranteed to have your money for the period of the CD's term. They ensure that term with the penalties you'll pay if you take the money out earlier. And the longer the term of the CD, the longer they get to invest your money to earn returns for themselves at a higher rate then they are paying you. And that's worth something to them, as demonstrated on the rate sheet you can find on their website or by asking a teller.
If you're comfortable that you've got a certain number of dollars that you're not going to need for a certain period of time, a CD may be the way to go. In a situation like that, the main competition to the CD is the stock market. After all, if you have money that you're not going to need for a while, why wouldn't you invest it? Still, the CD does fill a niche. Sometimes the dollar amount is big enough that the savings account makes you feel like you're missing out on interest, but you're going to need it soon enough that the ups and downs of the market is a bigger gamble than it makes sense to risk. After all, the stock market will usually normalize to a net gain over the span of a year or two. But if you only have 30 or 60 days, one bad earnings report from a blue chip or an incendiary tweet from a world leader can cause a drop in your investments from which you won't recover in that brief a time. A CD protects you from that.
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— Eric Litwiller has spent the last eight years of his professional career helping people achieve their financial goals through the use of budgets, retirement vehicles, and estate planning options. He is a firm believer in the importance of using earthly riches to fulfill a mission of Christian stewardship. Eric is not a licensed financial planner.