By Bryan Lee, CFP®, MBA
Picture this: you have a stack of cash sitting in your bank account, providing you with a sense of financial security. But have you ever wondered if that idle cash is silently eating away at your hard-earned money?
Let’s talk about the concept of idle cash so you can understand how keeping excess cash on hand can lead to missed opportunities and loss of purchasing power. We’ll uncover the hidden costs of idle cash and explore how you can make your money work smarter, not just harder.
Origins of 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 if they haven’t enabled automatic reinvestment. 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 or remaining in your bank account is usually not a wise financial strategy. There is no one right amount of cash to hold and it is different for every person and family, but we 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, allowing more to go towards investments and grow over time.
Investors can also consider home equity as one source of emergency funds if they put a HELOC in place or a taxable investment account which can be accessed prior to retirement. Both options allow investors to reduce the amount of cash on hand and keep more funds invested for the long-term.
Stay on Top of Your Accounts
Do you know how much idle cash you’re carrying? You may consider the money you put into mutual funds as being invested, however, some funds may keep up to 5% of the portfolio in cash and cash equivalents. Just like cash sitting in a bank account, this can dampen long-term returns. Other types of investments, such as ETFs, can have much less “cash drag” by reducing the need for cash reserves in the fund. 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 reducing 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?
A Better Alternative
Our Strategic Financial Planning team members strive to find the best way to put your money to work and align your investments with your current needs and future goals. Whether you’re saving for your child’s education, adding to your retirement accounts, or planning to purchase a new home, we want to see your investments reach their potential.
It’s important to understand 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, either a high-yield savings account, CDs, or short-term securities may be some options to consider, but they come with their own risks. These types of investments can be liquidated in less than a year but can earn better returns than money collecting dust in your regular savings account.
How We Can Help
Remember, your money is a valuable resource that has the potential to grow and generate future opportunities. Don’t let idle cash silently erode your financial well-being. Understanding the implications and taking proactive steps allows you to better optimize your cash holdings and put your money to work.
If you’re ready to explore investment or high-yield savings options, Strategic Financial Planning, Inc. would love to help. Call (972) 403-1234 or contact us online to set up a complimentary get-acquainted meeting so we can see if we are a good fit!
Bryan Lee is the founder and president of Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With more than 27 years of industry experience, Bryan uses a unique client-first financial life planning approach and process to help his clients get the most out of life. Bryan earned his Bachelor of Business Administration in finance and his MBA in international finance from the University of North Texas. He is also a CERTIFIED FINANCIAL PLANNER™ professional.Bryan is actively involved in his community and industry and has served on the boards of several associations and charities, including the Dallas/Fort Worth chapter of the Financial Planning Association, the National Association of Personal Financial Advisors, Family Services of Plano, the CITY House, and the Journal of Financial Planning. Bryan has been featured in local and national media, including The Wall Street Journal, Investors Business Daily, CNNfn, USA Today, SmartMoney, Kiplinger’s Personal Finance, Financial Planning Magazine, The Dallas Morning News, and Dow Jones Newswires. And, he has been recognized as a Five Star Wealth Manager and one of Dallas’s Best Financial Planners in D Magazine every year since its inception and recently as a Top Wealth Manager. To learn more about Bryan, connect with him on LinkedIn.