Cash is an important part of any financial strategy. The way you use cash depends on your stage of life. We know that cash helps us to meet our everyday spending needs however, the cash strategy for a pre-retiree and that of a retired individual will look different because their sources of income are different.
Having a surplus of cash may seem like a good problem but there are long-term consequences to having too much cash in your savings account. Keep in mind, cash comes with its own set of risks with loss of purchasing power being one. Although some people still prefer to store cash under their mattress, savings, checking and money market accounts are usually the preferred method when it comes to cash buckets. Rates on these accounts combined have generally been 2% or below. When comparing that against an average long-term inflation rate of 3%, it becomes easy to see the long-term negative effect of having a surplus of cash.
If you’ve ever wondered why the dollar “doesn’t go as far as it used to,” the answer to that is inflation. Inflation represents the general increase in the price of goods and services and corresponds with the decrease in the value of the dollar over time.
So, how much cash is too much? Generally, a good cash strategy should help you meet the following needs.
Unexpected expenses – You should set aside cash to cover emergencies such as job loss, major repairs or medical expenses. The importance of saving for an unexpected expense was highlighted with the recent pandemic where many lost their jobs or saw their hours reduced. As a rule, you should generally set aside six months’ worth of living expenses to cover emergencies.
Everyday expenditures – These are your day-to-day expenses such as food, entertainment, rent or mortgage payments and utilities. If you haven’t already determined the amount you spend each month, create a budget to help you understand how much you allocate monthly and make a goal to set aside enough cash to cover yourself for one to two months.
Short-term goals – Are you planning a vacation, wedding, or planning to make a big purchase within the year? Create a savings strategy to help you meet these short-term goals. A budget can allow you to determine where you may be able to cut some expenses to begin saving, and of course the amount you need to set aside for these short-term goals will vary depending on what goals you need to meet.
Investments – Cash can be used as a long-term investment strategy. Consult with your financial professional to determine how much would make sense in your individual situation.
Cash is not a risk-free strategy but is often times used as a safe haven for individuals who may be afraid of market volatility. It comes with its own long-term consequences and having too much may derail your retirement plans. Speaking with a financial professional who can help you uncover your goals, time horizon and objectives, can be beneficial in helping you create a cash strategy. PlanTrust Wealth Management is a fiduciary, acting in your best interest and can help you create a personalized solution to meet your specific needs.