Financial Journey Articles
Extra Cash?
Protect It, But Give It the Freedom to Grow
Keeping some cash in reserve for emergencies is a wise strategy, but allowing too much of it to sit idle is to ignore opportunities to improve your financial position.
If you think you may have too much cash on stand-by, you can decide to make some of it work harder for you. Before you act on that idea, however, be sure you have no debt that should be paid off (credit card debt, for example) and that you have fully funded your retirement plans. Then assess your true cash needs, taking into account such things as job security, housing situation and your health and that of your dependents.
How Much Is Needed?
Determine how much cash you really need to keep totally liquid - money you can easily access because you have it in a bank savings account or money fund. The general advice is to keep in reserve the equivalent of from three to six months' wages. That money is to cover a critical, unexpected financial crisis. However, not all of it needs to be kept in a checking or savings account.
You might find $10,000 to $15,000 adequate to cover three months of basic expenses. If you have a much larger cash reserve, and if it far exceeds your likely short-term needs, perhaps some funds should be shifted into your regular investment portfolio. For the rest of the cash you want easily accessible for short-term needs, investigate alternative ways to keep it within easy reach, yet make it work harder for you.
Cash In Deeper Reserve
In addition to the higher-paying money market accounts, consider bank certificates of deposit, which are insured up to the usual FDIC limits and usually offer a slightly higher interest rate. Although there is no assurance that this trend will continue in the future, these days, the shorter-term certificates are paying as much or more than the long-term versions, so you may wish to consider creating a rolling ladder of three-month CDs by purchasing three of them, one to mature in four months, one to mature in five and another to mature in six months. If at maturity you don't need the cash, reinvest to keep the ladder rolling. These funds, although not immediately available (without penalty), will become accessible as your liquid cash is used up, if your crisis reaches beyond three months.
The Tax-Free Alternative
If you are in a high tax bracket, don't neglect checking into tax-free securities that may provide you with a better return. Let me know if you'd like to consult the Raymond James 2007 Tax Planning Tables. One chart in the brochure provides detailed tax-free vs. taxable comparison values for various tax brackets.
There are other, more complex, options that might be suitable for your extra cash, and I would be happy to discuss them with you. If you have concerns about how to make your cash reserve work harder for you, just give me a call.
Material prepared by Raymond James for use by its financial advisors.
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