Cash is King

How to optimize your cash and why it’s time to pay attention

It’s been a while since you’ve seen any meaningful interest credited to your savings account.

Sure, 75 cents here or maybe you even saw your monthly interest credit break into the dollar-plus range if you were sitting on a more sizable emergency fund.

But as our good friend Bob Dylan says, “the times they are a-changin’”.

Or in this case, the interest rates they are a-changin.

For the same reasons we have seen the 30-year mortgage rates break into the 7% range, we are finally seeing a corresponding move in interest payments in our cash accounts.

So, what does this mean for you? You may already be asking yourself whether you’re positioned to best benefit from the shift in rates, or if you have enough cash on hand, too much and if it’s in the right accounts.

If those are the types of questions you have mulling around your head, read on to learn how to best optimize your cash balances and why now is the time to pay attention to your cash. First, let’s address some key questions.

Why keep cash in the first place?

Two reasons: convenience and stability.

Those are the only reasons anyone would sit on any meaningful cash position long-term, given its limited growth potential.

That said, convenience and stability carry immense value and are not to be overlooked.

Anyone who argues otherwise should attempt to purchase their morning coffee from Starbucks with shares of stock. Yes, over long periods of time stock has a much higher expected return, but it can’t instantly gratify the need for a morning dose of caffeine.

Although cash can sometimes feel “boring”, it has a key role to play in your financial plan and deserves your attention now more than ever.

How much cash do I need?

Now that we have established that cash is important, the next obvious question is, “how much cash do I need?”

And you are going to love the answer: it depends.

While I am unable to give an exact answer tailored to your situation, I can provide some rules of thumb to help you make an informed decision for yourself.

The first rule of thumb to lean on is to have 3 to 6 months of living expenses in cash on hand.

Meaning, if you add up every dollar you spend on a monthly basis (mortgage, credit card, utilities, etc.) and multiply that number by 3, that’s the bare minimum amount of cash you want to have on hand.

If you want to be a bit more conservative and sit on more cash, you can multiply your monthly living expenses by 6 to be at the high end of that range.

Again, this is a rule of thumb, not one of the 10 commandments.

Back to the “it depends” answer. There are certain situations where I would recommend a client breaking this rule of thumb.

I work with Top Producing Real Estate Agents to help them manage their personal finances. I NEVER recommend a real estate agent sit on only 3 to 6 months of cash.

Why? Real estate agents have variable incomes that are partially dependent upon the seasonality of market conditions which are out of their control. For those reasons, I typically recommend a real estate agent have 6 to 12 months of living expenses in cash.

Double, the rule of thumb!

So, when you are deciding on your target cash amount, start with the rule of thumb and customize it for your situation.

How to Optimize Your Cash

To learn how best to optimize your cash, I want to address two key concepts for you to be mindful of: not all accounts are created equal and be aware of too much of a good thing.

Not all accounts are created equal

Since not all banks or accounts are created equal, this is where you have the ability to optimize your cash.

Given the two objectives of your cash, convenience and stability, one would argue that two different cash account types would make sense, as various cash account types achieve different goals.

First, to satisfy your need for convenience, you need a boring checking account.

Preferably one without any fees or strings attached that will give you a debit card and a checkbook (if people even use those anymore)

Remember, your checking account is all about convenience and will offer you precisely 0% return, so the goal here is to maintain a balance that keeps you confident you won’t overdraft while also avoiding excess.

The next account we are looking for needs to satisfy your need for stability, but we no longer need convenience, because our checking account is already doing that.

This is where a High Yield Savings Account (HYSA) fits the bill.

A HYSA is an FDIC-insured savings account that has limited features, and in exchange, pays you a ton more interest.

Another key component to a HYSA is liquidity.

Unlike other saving avenues like a CD, which requires your money to be locked for a period of time, a HYSA is totally liquid.

So, if you need your money back tomorrow, you can transfer it back to your checking account without penalties or fees.

Here is a list of HYSA’s to consider when you are making your choice.

Beware of too much of a good thing

Have you ever sat down for dinner after a long day of work and dished yourself up a huge plate only to discover that your eyes were maybe a bit bigger than your stomach?

When it comes to cash, it can be easy to run into the same temptation, especially if you are coming from a situation where you didn’t have a fully funded cash account to rely on.

You crave the security that cash provides!

My goal is for you to avoid the bellyache of a net worth bloated with an asset that doesn’t grow.

Cash plays a vital role in your financial plan, in fact, you absolutely need it to thrive financially. But, there comes a tipping point where cash actually becomes a drag on your net worth.

The biggest contributors to cash dragging down your net worth are taxes and inflation. And, quite honestly, even the most eloquently optimized cash management plan can’t keep up.

While it is absolutely important to get your cash allocated correctly, don’t fall into the trap of over-allocating cash in your net worth.

It is vital that you get your net worth growing and working for you over time so that you do not get to retirement age and discover your eyes for cash were a bit bigger than your stomach could handle.