By Marjorie L. Rand, CPA, CFP®, RICP®
You might think of your nest egg as a safety net, but have you ever thought, “Maybe I should be doing more”? If you have savings above and beyond what you need in an emergency fund, you could be exposing your money to risk. Idle cash does not typically keep up with inflation, therefore, you could risk losing long-term purchasing power as well as missing out on opportunities for growth.
Putting some of your idle cash in play gives your money the opportunity to bring in greater returns and increase your overall wealth.
What Is Idle Cash?
Idle cash can build up in a variety of ways. Young professionals earning more money than they are used to can let cash pile up in their savings because they don’t know how to make it work for them. Experienced investors may not even realize they have idle cash sitting around from dividend payouts that aren’t automatically reinvested. Cash from passive revenue streams, such as rental properties, may not be integrated into your investment portfolio and could be actively dragging down your return potential.
Regardless of where the cash is coming from, having too much of it idle in your portfolio is not a wise financial strategy. There is no right number and it is different for every person and family, but I believe one should have a cash contingency target to keep in reserves based on your unique circumstance. Other than this backup cash, the amount of idle money in your portfolio should be limited, with additional funds being productively put to work.
Know How Much Is Idle
Do you know how much idle cash you’re carrying? You may consider the money you put into mutual funds as being invested, but did you know that these funds usually keep about 5% of the portfolio in cash and cash equivalents? (1) Evaluate your portfolio as soon as possible, because the excess cash sitting in your savings is losing the fight against inflation.
Inflation has increased costs, and the value and purchasing power of $100 today is very different from that of 30 years ago. Even with rising interest rates, idle cash is still not earning nearly enough to effectively combat inflation and holding on to excess cash for the long term is effectively minimizing the potential upside of your hard work. What can you do with the extra cash? How do you reinvest it so you maximize its return?
Look at Alternatives
At Rand Financial Planning, I strive to find the best way to put your money to work and ensure your investments align with your retirement planning needs and future goals.
It’s important to understand that there are more efficient ways to handle cash than simply stockpiling it in a checking or savings account. If you need liquidity but still want to put your cash to work, consider investing in short-term securities. These types of investments can be liquidated in less than a year but earn better returns than money collecting dust in your savings account.
Municipal bonds, real estate, and savings bonds are all excellent long-term investment options if you’re in a position to limit access to your funds for an extended period of time. These types of investments require commitment but can be lucrative if held until maturity.
As part of my Comprehensive Financial Planning service, I help my clients by showing them the potential returns that could be lost by holding cash long-term. I assess portfolio allocations to help determine the most prudent investment strategy to leverage maximum profits from their cash. If you are interested in learning more about the services I offer, I’d be happy to speak with you to see if I’m the right fit to help you on your financial journey. Call or reach out to me at 908-895-2406 or email@example.com.