Wow, there is a ton of cash on the sidelines! Personally, I don’t view cash as an investment. Clearly investors disagree as $6 trillion currently sits in money market accounts. For some perspective, in 2015 there was $3 trillion. So, what’s going on and what’s the right amount of cash to hold?

Higher interest rates continue to attract cash into money market funds and away from traditional bank accounts. In addition, dollars previously directed to fixed income investing seem to be rerouting towards money markets now. Why? Lower transaction costs, liquidity on a shorter time horizon, and similar yields, what’s not to like?

So, what exactly should an investor do? Is moving your cash into a higher yielding account the right decision or should you keep it where it is? The answer to this question arises by evaluating all accounts and assigning a timeframe to each. By providing a job description to cash and investments, a number will come into focus.

Some cash will be short term, other cash may be longer term. Knowing the difference between each is helpful in directing your dollars to the right location. This may include traditional bank accounts and/or holding cash in a money market account.

Big-ticket expenses and ad hoc purchases on the horizon may encourage you to hold more accessible cash. College tuition payments, weddings, new car purchase, home improvement, etc.  Does the entire amount need to be in cash? No, not necessarily.

It’s up to an investor and their significant other to decide on cash levels and what might be financed. The key is having a conversation well before it’s necessary. What’s your philosophy or approach and is your spouse on board? This reduces friction and provides time to think before a decision is made.

Reviewing accounts and assigning purpose highlights liquidity needs. Investors may be holding too much cash, others not enough. By completing this exercise each year, answers to “how much cash should be held” become clear. Various life stages have unique cash requirements, it’s a dynamic conversation and not set it and forget it. Now let’s discuss segmenting your cash.

Holding all your cash in a single account is problematic IMO. When your emergency fund, summer vacation monies, and general savings all hang out in the same account, difficulties can arise. Taking cash from an account that serves multiple purposes can leave you feeling anxious about the remaining balance. Is there enough left for summer vacation?

The solution is segmenting your cash beyond a single account. Starting with an emergency fund, here’s where you’ll hold three months of fixed expenses or an amount that makes you feel safe. Employment choices, bonuses, and reoccurring cashflows tend to influence your number.

Then, set up an active cash reserve in another separate account. Automatically refilling reserves from each pay cycle keeps this account ready for what life throws at you. By separating this account from your checking account, you ensure cash doesn’t evaporate into other reoccurring expenses.

For investors who are retired or preparing to retire, it’s helpful to establish a travel and fun account. After decades of employment, spending what you have with confidence is more difficult in the early phases of retirement. The save, save, save mentality is hard to turn off. Holding cash specifically for travel and fun activities allows your dollars to be spent as designed.

Like so many things in life, you don’t want to be controlled by your cash. Holding the correct amount in the right account makes a difference. This allows you to invest the rest feeling purposeful in your decisions. Updating your choices once a year provides confidence in where your cash should be.

Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.

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