- Holding too much or too little
- Chasing a return or yield
- Lumping all your cash in one account
Last April, you may have wished for more cash in the bank as your investments continued to contract in value. This April, these same investments are expanding to all-time highs. How does market performance impact the amount of cash you hold? Have you formed an opinion on what’s best for you and your family?
Your answer may depend on a number or variables and your spending habits. Start with your monthly expenses, do you have a rough idea on what it takes to run your house each month? Yes, super, skip the next several sentences and continue reading. No, that’s ok, this is a judgement free zone! Take a minute to log in and review your bank or credit card statements (depending on how you spend) from last spring. This is when all discretionary spending came to a screeching halt. You likely only spent what you needed (minus over allocating on groceries and cleaning supplies). Here’s the number it takes to run your house. Now, ask yourself, is this number greater or less then what your employer deposits into your account each month? For most, it’s less but for some it may be more. Again, no judgement here, getting clear on this answer is very freeing and will help you adjust your spending habits. No need for drastic changes as rarely do they stick. It’s about raising awareness so you may positively influence your spending habits. You can’t make progress if you don’t know where you stand. Don’t waste last year’s crisis when it provides you answers on your spending. No complex budget required.
Now, consider your employment-how secure is it? How long could you spend before depleting savings if a change arose? What about a big-ticket expense such as a medical bill or fixing your roof? One month, four months? How do you feel about what’s available? Are you anxious or accepting with the amount of cash that you see? Now ask your significant other what they feel is enough, this may surprise you. Depending on how you pay or split expenses, this may be a learning moment for you both.
If you and your significant other would feel better having access to additional liquidity but don’t want to hold it in reserves, consider utilizing a home equity line of credit. The best time to get this established is when you don’t need it, perhaps now? You only are charged interest when you withdraw from the line of credit. Typical lines will last ten years. This lifeboat of cash will allow you to achieve the right reserve levels so you may turn your attention towards other planning matters. If necessary, you may stage withdrawals from cash reserves first, then equity line second. More importantly, you are informed and have a process to determine the right amount of cash you should hold.
Mistake number two includes chasing yield or returns on your cash. All returns or growth should be allocated towards your investments in equities. These companies vary in size, location, and industry and will over the long-term contract and expand in price and perhaps pay dividends. Our brains are wired so that we think we need a return on our cash because we need a return on our investments. Our brains trick us to think we need a return on everything! The reality is that a return of our cash is more powerful than a return on it. This simplifies the math as accessibility matters. Knowing that at a moment’s notice you may have your cash with no strings attached is priceless. This is a power concept to recognize as we are overwhelmed with messages pitching high interest savings or checking accounts. Since when is .10% “high interest”? No thank you, I’ll invest my monies in equities directed by my long-term plan and keep my cash accessible.
How can mistake number 3 be a mistake, keeping all your cash in one account? The truth is when you hold your cash reserves in the same account as your summer vacation funds, conflicts arise. Segmenting out your cash in a separate account with a specific purpose allows you to hold it accountable and not take away from other priorities. Attempting to mentally account for all the needs your cash should serve from one account is stressful on the brain. A better solution is to keep cash reserves separate in their own account. Once you’ve reached a comfort level you may redirect contributions to another cash account that may address other short-term goals. Funding this account automatically each month allows you to have cash available before it’s necessary. No scrambling, no reacting, just taking it from the account and using it based on its purpose.
Having cash available for the right job description allows for a better spending experience. Avoiding these mistakes will increase your confidence in how you handle your cash. With your reserves met, you can proceed to plan and invest for tomorrow. Have a question or comment on what’s best for you? Reach out below and we may chat.
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.