There’s no denying it: it’s thrilling to see the numbers add up in our bank accounts. Seeing a high balance makes us feel secure, and ensures we have cash ready and available should we need it. But could keeping all that cash in your account be keeping you from greater returns in the long-run? Unfortunately, yes.
When you have more cash sitting in your bank accounts than you need, you are not maximizing its potential. But if you put your idle cash in play, you are giving your money the opportunity to bring in returns and increase your overall wealth.
Where Does Idle Cash Come From?
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. But how much cash is too much? You want to make sure you have enough to help you through an emergency, so it’s recommended that you have at least three months worth of easily accessible funds to cover everyday expenses. Other than this backup cash, the amount of idle money in your portfolio should be limited.
Stay On Top Of Your Accounts
According to the CFA Institute, portfolios of actively managed funds typically carry a cash position of about5%, causing the funds to lose a portion of the long-term equity premium. Do you know how much idle cash you are carrying? Evaluate your portfolio as soon as possible, because the excess cash sitting in your savings is losing the fight with inflation.
Inflation has increased costs, and the value and purchasing power of $100 today is very different than that of thirty years ago. Cash has a near zero expected return, so holding onto excess cash for the long-term is like throwing it away. What can do with the extra cash? How do you reinvest it so that you maximize its return?
A Better Alternative
At 1on1 Financial, we strive to find the best way to put your money to work and ensure that your investments are aligned with your current needs and future goals. Whether you are saving for your child’s education, strengthening your retirement accounts, or wanting to purchase a home, we want to see your investments reach their potential.
The cash that’s accumulating in your checking or savings account yields little to no interest, so if you need cash readily available, consider investing in short-term securities. These type 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 are 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.
How We Can Help
If you think your portfolio is cash heavy, we can help. Our team can show you the potential returns that could be lost by holding cash long-term. We also assess your portfolio allocations to help you determine the most prudent investment strategy to leverage maximum profits from your cash.
You may not realize it, but holding onto idle cash can significantly impact your bottom-line. Talk to us today to find out if idle cash is affecting your return potential. Set up an appointment by calling my office at 909-981-1720 so we can make the most of every dollar.
Philip A. Board MSFS, CFS, is a retirement planning specialist and the founder of 1on1financial, an independent comprehensive investment firm serving individuals and businesses near Upland, California. Through educational workshops and a non-sales environment, 1on1financial specializes in working with employees of Southern California Edison, UPS, Esri and Verizon.