Asset Classes Part 1: Cash Rules Everything Around Me (C.R.E.A.M.) - Minimalist Wealth
Asset Classes Part 1: Cash Rules Everything Around Me (C.R.E.A.M.)
Cash, Savings, and Certificate of Deposits
This is the slowest-growing investment, and is not risky or volatile. Your principal can only grow steadily. In this class of investment, you are rewarded for sacrificing liquidity rather than certainty and stability.
Liquidity: How accessible your money is- how easily can this money be made available for use?
Let's see some examples of cash investments with different liquidities.
-Cold hard cash is the most liquid form of currency: You’re already holding it! It doesn’t grow at all, but you can use it to pay for services, buy apple juice, etc.
-Checking accounts are almost as liquid. You can use it to pay at many places, and withdraw paper money at ATMs. But it is stored at a bank. Some banks like Schwab and Ally will pay you a tiny amount of interest to compensate you for your small loss of liquidity.
Compare these to a less liquid 1 year CD from Ally.
You are loaning this money to the bank, meaning you can’t access the money for 1 year. You’ve lost more liquidity, and will be compensated more for it. If you want to cancel the CD early, you will get your money back, plus all the interest it has earned, minus the interest earned in the last 60 days. So if the annual rate is 0.9%, and you cancel after 61 days, you would earn 1 day of interest, or ( 0.9% / 365) %
Here are some 1-year CD rates offered by banks as of July 2013:
APY (Interest Rate)
This is almost nothing, and well below inflation. Even worse, interest is taxed at regular income tax rates. This asset class is where you want your rainy day fund and nothing more.
If Cash is like the relationship one has with their spouse; dependable, safe, there for you during times of crisis, then Bonds are like the relationship one has with their long-term mistress or mister: A thing on the side that is less certain, more complicated, and certainly more sexually exciting. Learn about that asset class here.