Who's Holding All That Cash? - Flowerstone Financial

I’m curious and want to know who’s holding the ≈ $7 trillion of current cash reserves? Per the Investment Company Institute (ICI), this number is spread out among retail investors and institutions. I’m a retail investor. So are my clients and so are you. So who exactly are the institutions?

Institutions can be broken down into various groups. First you have large corporations that hold billions in reserves for acquisition, infrastructure, and general investment. Think of S&P 500 companies like Apple, Microsoft, Exxon Mobil, etc. Next you have the big banks such as JPMorgan Chase, Citigroup, and Bank of America. Then pension funds that hold retirement dollars for current and future retirees. Examples include TIAA Cref and CalPERS (California Public Employees Retirement System).

Up next you have large insurance companies like AIG, MetLife, and Prudential. Foundations and endowments are included, as are broker dealers and asset managers. BlackRock, Vanguard, Morgan Stanley, Goldman Sachs and Fidelity easily come to mind. Finally, state and local governments invest their surplus in money markets too.

Now that we know who’s holding the cash, what’s the percentage breakdown between retail investors and institutions? These estimates from ICI are updated weekly, here are numbers from their most recent report. Roughly ≈ $4 trillion is held at institutions while retail investors are holding just under ≈ $3 trillion.

As a retail investor, how do you make the most of your available cash? I ask my clients to assign a job description to the cash held in their bank accounts. This ensures all their cash is NOT lumped into a single account. Why? It’s hard for our brains to keep track of all things our cash is supposed to be doing if it’s in a single account. Spreading cash out with a purpose reduces fatigue which minimizes mistakes.

A better approach is holding emergency savings in a local bank account that covers recurring monthly expenses. Money is personal, so some investors will hold more, some will hold less based on income, job security, and what gives them peace of mind. In real-life spending, emergency savings are rarely used, but should be there if you need it.

Beyond emergencies, holding an active savings account at the same bank allows inflows and outflows of cash. Automating ACH contributions after payday allows balances to accumulate so withdrawals can be made. This active account is often a reservoir for net stock proceeds, bonuses, kids’ activities, renovations and family vacation.

Cash reserves don’t end with local accounts; our clients hold reserves where their investments live too. Why? When it comes time to liquidate investments, their cash needs a home and purpose to support sustainable spending. When to liquidate investments and how much cash to hold is all decided based on your spending patterns.

Spending is never a straight line, there are lumpy months, lean months, and robust months. The key to managing the right amount of cash, locally and where your investments live, is figured out by planning. Conversations provide direction as life plays out.

“Plans are worthless, but planning is everything” said Dwight Eisenhower, and I agree. Rarely does life unfold as expected, surprises are lurking just around the corner. Ongoing planning supports fewer reactions and a more measured response regardless of what comes next. This supports holding the right amount of cash in the right accounts.

Who’s Holding All That Cash?