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Cash is Boring

Obviously, if you have a lot of it, it’s not boring. What we mean is that cash is relatively boring in an overall investment portfolio and financial plan. Yet, it takes the most discipline to save and keep. It must be saved intentionally, primarily to provide a safety net in case earned income stops due to a job loss or a large, unexpected expense rears its ugly head, such as a medical issue or a major home repair.  It takes a lot of discipline because once you have some saved, it becomes this big, shiny object that you want to play with and spend on unnecessary things. Or FOMO kicks in and you want to start buying into the crypto craze, seeking a better return than the meager interest rate the banks are offering. Cash reserves are not to be invested; they are meant to be boring!

Because cash is boring, it’s often the most overlooked part of a financial plan (that and life insurance). The question has always been, “How much is enough?” The answer is twofold:  job security and monthly expenses. If you have never been laid off from your job and feel pretty secure about it, the cash reserve need may not be as high. A quick way to calculate it is to add up all the debits from your most recent checking account statement. Be sure to do the same with your credit card. Then ask yourself, if earned income suddenly stopped, how many months need to be covered in order to stay afloat and NOT tap into retirement savings to cover household expenses? Be realistic and err on the side of more, not less. $25,000 minimum is a good starting point for most households.

Most people do not take the time to shop around for rates to find the best place to park their cash. Often, it’s a matter of convenience to open a savings account along with a checking account with your primary bank, yet it is likely earning a fraction of a percent.  Yes, rates are low across the board for cash deposits, but if your bank offers 0.05% for their “high performance” savings account with a minimum deposit of $10,000 and another bank is offering 0.5% with no minimums and no fees, why wouldn’t you want to earn ten times more on your money? Where do you find these types of accounts? The quickest place to research savings account rates is www.bankrate.com.  Once established, these online savings accounts can be linked to your primary checking to easily transfer money back and forth.  Ideally, you should then set an amount to be automatically transferred to your savings account each month. Set it and forget it until a sufficient amount has been saved.

As alluded to earlier, retirement savings (401k, 403b, IRA, Roth IRA, etc) are not meant to be used as a bank account. This cannot be stressed enough! Some plans offer loan provisions, but a loan should ONLY be used as a last resort. If a loan provision does not exist, retirement plan withdrawals get pretty ugly with taxes and penalties.  

The past two years have been interesting, to say the least and certainly stressed the importance of cash savings. While the infusion of cash from the government into U.S. households helped, it is not nearly enough to cover expenses for a prolonged period of time. When you have diligently saved enough to cover unforeseen circumstances, it can help protect you and your family from financial disaster.