Are You Losing Money in Idle Cash?
While it’s good to have some money in the bank as an emergency fund, did you know that by letting your cash sit in the bank, you could be exposing your money to risk? Your idle cash isn’t able to keep up with inflation and you could risk losing long-term purchasing power and miss out on opportunities for growth.
When you have more cash sitting in your bank accounts than you need, you are not maximizing its potential. Let’s look at why letting your money sit in the bank might not be the best decision (and what to do instead).
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 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 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, with additional funds being productively put to work.
Audit 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, but did you know that these funds usually keep about 5% of the portfolio in cash and cash equivalents? 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?
What Should You Do With Your Idle Cash?
At The Rosamond Financial Group, we 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 are saving for your child’s education, strengthening your retirement accounts, or wanting to purchase a new home, we want to see your investments reach their potential. For most investors, idle cash isn’t the way to do 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.
How We Can Help
If you think your portfolio is cash-heavy, we can help. Together, we can assess the potential returns you may be losing out on and recommend a prudent investment strategy to leverage maximum profits from your cash. We specialize in helping successful business owners, corporate executives, and affluent retirees pursue their financial goals with confidence.
If you’d like to discuss your investment allocations (or any other financial matter), book a free introductory meeting online!
Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing firstname.lastname@example.org or schedule a call on his online calendar.