Cash In Your Financial Plan
By: Cameron Diehl, CFP®
Friends – With talk about interest rates regularly in the news these days, I wanted to share some thoughts on an area that is directly impacted by these changes and an area that I don’t think gets anywhere near enough attention in financial planning conversations – cash.
Below are six questions to ask yourself about how you manage your cash. If you’d like to discuss any of the points below, please don’t hesitate to reach out. I’m always happy to help.
- How does your cash balance make you feel?
Studies have shown that cash on hand provides a disproportionate increase in many investors’ feelings of financial satisfaction.* Given that a big part of financial planning is feeling comfortable and confident in your plan so that you can stick with it over time, I regularly advocate holding a bit extra cash if it will make you more comfortable – especially now that yields have begun to rise. This has proved particularly useful given recent market volatility.
- What role does cash play in your financial plan?
Cash is the linchpin of any financial plan – everything flows through it – income, spending, saving, investing. It supports your day-to-day lifestyle, can provide a safety net in case of emergency or available capital for timely opportunities (taking that new job, starting a business, taking advantage of market volatility, etc.). Having clarity around your cash flow and liquidity is the foundation of good financial planning.
- How much cash should you have on hand?
Rules of thumb range anywhere from 3-6 months all the way up to 2-years of living expenses. This depends on a number of factors including where you are in life, your level of expenses, how much control you have over those expenses, the sources of income in your household, the stability of those incomes, upcoming cash flow requirements, other sources of liquidity and more.
- What is your cash earning (after taxes)?
Short-term interest rates reached ~0% in late 2008 and didn’t begin to rise until late-2015, meaning for the last decade returns on cash and equivalents have been almost non-existent. This has only just started to change with many taxable money market options yielding ~2.5% in recent months. And, depending on your tax bracket, short-term municipal options may be even more attractive. If you haven’t assessed what you’re earning on your cash on an after-tax basis lately, now may be a good time to check in.
- How safe is your cash?
Depending on the type of cash or equivalent investments you may be covered by the Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC), up to certain limits. Knowing that your holdings are safe and insured is critical, especially if you carry significant balances.
- How accessible is your cash?
The ability to easily access and manage your cash balances is important to a smoothly functioning financial plan. Being able to quickly and cost-effectively move money between accounts or financial institutions, manage payments, automate saving / investing, track spending and liquidate holdings on short notice can make managing your financial life much easier and less stressful.
Disclosure: Any opinions are those of Cameron Diehl and not necessarily those of Raymond James. An investment in a money market fund is not insured by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
*Source: “How your bank balance buys happiness: The importance of ‘cash on hand’ to life satisfaction. (Ruberton PM, Gladstone J, Lyubomirsky S, 2016).
