A - Yellow Money
Advantages: High liquidity
Disadvantages: Gains or Lower return
Examples: Bank Accounts, CD's, Cash Accounts
- The goal of Column A, Yellow Money, is to provide a sufficient amount of liquidity for the majority of your portfolio while keeping it protected from losses due to fluctuations in the stock market.
- Remember, yellow money is money that typically earns lower returns, is guaranteed by FDIC, and can be liquidated with minimal expense and maximum efficiency. We are not expecting big gains in these assets because this is “cash” or short term funds. As a rule, the longer the time horizon and overall risk for an investment, the greater the potential returns.
- You also want to have cash available in the event you can’t work for six months to a year. You don’t have to keep 6-12 month’s salary available; however, you do want to have your basic living expenses covered. For example, if your monthly expenses total $2,500 and you wanted to cover six months, then you would need $15,000 in Yellow money accounts. If you wanted to cover a twelve-month budget at this rate, you would need $30,000. In order to get the most interest, make use of six to twelve month CD's and ladder their maturities.
Common Attributes of Yellow Money
- Not Investing, But Rather Savings
- Lower Returns
- FDIC Insured
- Bank Accounts, CD’s, Money Markets, Savings, Cash Accounts
- Taxable or Tax Deferred
- Average 1%-3% Historically
Two Yellow Money Categories
- Accessible with NO penalties for early withdrawal.
- Accessible with MINIMAL penalties for early withdrawal.
The reason you want to have liquid short-term Yellow money available is because you don’t want to be forced to sell off long-term assets. It is also important to make sure you don’t have too much Yellow money or it can diminish your buying power over time.