I am often asked what to do with excess cash. It’s a common question which seems simple, but it has many answers depending on circumstances. I’ll outline 10 situations that people often find themselves in and tell you how I typically respond. There’s no perfect answer, but if you have excess cash yourself, you’ll probably find one or more of these suggested approaches that will appeal to you.

Whenever I am asked this question, I have to ask some questions of my own before I can respond. What is the purpose of this cash? When do you expect you’ll need it? Often people will tell me they have emergency money, or they’ll say it’s set aside for some specific purpose such as a tuition bill or a down payment on a house. Frequently their answer is simply “I don’t know.” You’d be surprised how often I hear that.

There are many worthwhile places to invest cash. Some investors are willing to sacrifice a bit of safety to seek higher returns; others are willing to give up some potential returns in order to have a very high degree of safety. My own bias is toward safety and liquidity, which is the ability to have access to your money without penalty or delay. I make the following suggestions recognizing that what’s just right for one person may not be just right for another.

1. You have proceeds from a home sale that you will use to buy another home, probably within 12 months. This is truly short-term money, and I can’t see much point in taking any risk of losing the principal. If you put it in a money-market fund, you’ll be able to access it instantly at any time. If that’s too tempting for you to leave it alone, you could consider a 30-day certificate of deposit that rolls over automatically. That way you will never be more than a few weeks away from getting penalty-free access to your money. In early October, I found a one-month CD at a Seattle bank that paid 4.2 percent. Vanguard’s Prime Money-Market Fund had a yield of 5.1 percent. An excellent online resource for current rates, by the way, is www.bankrate.com.

2. You have proceeds from a home sale that you expect to need more than a year from now. You might consider a one-year CD. In early October, I found a one-year CD in Seattle paying 4.9 percent. However, tie your money up for a year only if you are completely certain that you have that long until you need it – or if you are certain you understand the early-withdrawal penalty and you’re willing to give up that much interest. Otherwise, consider 30-day CDs.

3. You have emergency money that you probably won’t need for any real emergency because you are a decade or more away from retirement, you have adequate income to meet your needs and you are able to continue adding to your retirement investments. This profile suggests to me that you don’t have to be overly conservative. You may have some limited tolerance for risk, and some additional return could be a welcome tradeoff. Here are two possibilities: First, you could invest in our Monthly Income suggested portfolio, dividing your money equally among four Vanguard bond funds: Short-term Investment Grade (VFSTX), GNMA (VFIIX), High-Yield Corporate (VWEHX) and Long-Term Corporate (VWESX). In October, those funds had yields averaging 5.9 percent. Second, if you’re comfortable with dipping your toes into equity funds, where you can get potentially higher returns, consider Vanguard Wellesley Income Fund (VWINX), which typically invests about 40 percent of its portfolio in relatively conservative stocks.

4. You have emergency money that is appropriately earmarked for emergencies because your income is limited, you’re retired or close to retirement. You don’t have much else in the way of ready resources to snap back from events that are unexpected. This is what I think of as “real” emergency money. You want it available when you need it with little or no concern about what the market is doing. Still, this is for situations that are unexpected; I hope you don’t live your life thinking that an emergency is lurking around every corner. For most people, major emergencies don’t crop up very often. I think you will want to get some return on this money so that its purchasing power keeps up with inflation. There are several decent possibilities, depending on your need for convenience, your risk tolerance and the amount of money you have. The most conservative option is to leave this in a money-market fund, where you have instant access and no risk of loss to the whims of the market. However, this may not keep you ahead of inflation. Because you probably will rarely need instant access to this money, you could put some of it into 30-day CDs that automatically roll over. If you have a bit of risk tolerance and enough money to make it feasible, you could invest as much as 20 percent of this in equities. One convenient way to do that would be to park half your emergency money in Vanguard Wellesley Income Fund and the rest in a money-market fund.

5. You have “emergency money” that isn’t really for emergencies but actually (when you are honest with yourself) is there for impulse spending. This is “I have to have this today, right now” money, and it should be at your beck and call in a money-market fund that lets you whip out a checkbook and find instant gratification. If you can afford this, I’m all for it!

6. You have what I call “lazy money” sitting in cash without any designated purpose. Many people have money that falls into this category; I have been guilty of it myself from time to time. Your first use of this money should be to pay off short-term debts and speed up (or beef up) your retirement savings contributions to your IRA and your 401(k) or similar plan if you have one. After you’ve done that, consider using some of this money to do something unexpected and nice for your family or your friends. There’s a world of possibilities, and if you are fortunate enough to have resources you don’t know what to do with, I guarantee you can make somebody’s life a little nicer if you put your mind and your cash to work on it. If you do it well, this will enhance your own life, too. Beyond that, put half of this money in the first four Vanguard funds mentioned in point # 3 and the rest in a money-market fund.

7. You have excess operating cash, for instance a checking account balance that’s greater than your regular needs for the next few weeks. Many people will spend a fair amount of time figuring out their investment strategies and still neglect their everyday cash. Let’s face it: Checking accounts rarely pay significant interest rates. A checking account is the right place for money you’ll need soon, and you don’t want to be transferring money between savings and checking every other day. However, most corporations manage their cash very carefully and don’t leave excess sums lying idle. They keep their money in money-market funds and transfer it to checking as needed. I think you should do something similar. And unless this surplus cash is temporary, you might evaluate whether it really belongs in one of the other categories I’m describing.

8. You have cash from an inheritance or some other one-time source that you haven’t figured out what to do with yet. This type of cash can involve substantial sums that need to be treated carefully. I like the concept of “precious money” to help me think about inheritances and other windfalls that come along only rarely in any one person’s life. This is not money to place at risk unless you’ve decided to invest it for the long term (in which case it no longer falls into this category). My suggestion for this money is half in 30-day CDs and half in a money-market fund.

9. You have a substantial amount, 10 percent or more, of your long-term investment portfolio in cash. In the short term, cash can indeed be king. But in the long term, cash is almost sure to lose purchasing power because of inflation. In general, I think you should stabilize your portfolio with fixed-income funds instead of cash. However, I know that some people just feel a lot more comfortable with a healthy stash of cash on hand, and I certainly wouldn’t want to deprive them of their peace of mind. If you’re one of those people, then keep your cash in a money-market fund, count it as part of the fixed-income part of your portfolio and consider increasing your percentage exposure to equity funds.

10. You have cash that you don’t think you’ll ever need for yourself or your family. If you’re in this situation, you are to be thoroughly congratulated. I have two suggestions for this money. First, make sure that some of this cash is invested for moderate long-term growth so you can leave it in your will. I suggest putting 50 to 60 percent of this money in equity funds, the rest in fixed-income funds. Second, give some of this money away now and get a great return in the form of satisfaction. Thoughtful giving can bring some of the best rewards you’ll ever get for managing your financial life well. I recommend it without any reservations.

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