Let’s talk about cash.
Cash might not be the most eye-catching part of your investment portfolio, but it is crucial. I often notice people either holding too much cash or not enough. Here are four important rules for effectively managing cash, from establishing appropriate emergency funds to understanding how to store funds and when to invest excess cash.
The foundation of healthy cash management is establishing an emergency fund. This fund should cover your basic living expenses for three to six months, including housing, food, utilities, and more. An emergency fund can provide a buffer in unexpected situations like unemployment, medical emergencies, or major home repairs.
The amount of your emergency fund can vary based on your personal situation. If you have a very stable job and multiple sources of income, a reserve of 3 months may be sufficient; but if your income fluctuates significantly, you are self-employed, or you are the sole breadwinner in your household, consider preparing a reserve of 6 months or longer.
Your cash reserves should also include short-term financial planning – expected expenses in the next one to two years, such as a down payment for a car, home renovation costs, or planned vacation expenses.
Holding too much cash can drag down overall investment returns. While cash provides stability and liquidity, its yield is typically low, especially in times of low interest rates. Additionally, inflation gradually erodes the purchasing power of cash over time.
Once your emergency fund and short-term goal reserves are in place, the excess cash should be invested in a portfolio that aligns with your risk tolerance and long-term financial planning. The key is to find a balance – you need enough cash to meet immediate needs and give yourself peace of mind, but not hold too much that it affects long-term wealth growth.
Where you store your cash is equally important. For many people, a combination of savings accounts and money market funds is a suitable choice.
High-yield savings accounts offer good security. They are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per bank, per depositor, and typically provide higher returns than traditional savings accounts.
Money market funds are another good option. These funds invest in short-term, high-quality debt instruments, aiming to maintain a stable value. Their yields may be slightly higher than savings accounts, especially in times of rising interest rates. Although money market funds are not FDIC-insured, they are generally considered low risk.
Individuals in higher tax brackets may consider municipal money market funds. These funds invest in short-term government debt, with their income typically exempt from federal taxes, providing a higher after-tax return.
Finally, understanding the insurance limits for cash deposits is crucial. FDIC provides insurance coverage for bank deposits, with a maximum of $250,000 per depositor per ownership category at each insured bank.
If your cash deposits exceed this limit, consider spreading your funds across multiple banks to ensure comprehensive protection. Another option is brokered CDs, which sometimes offer higher insurance coverage limits.
While the risk of cash losses due to bank failures is low, understanding these limits and taking protective measures is always a wise move.
By following these four principles, you can ensure efficient cash management, safeguard financial security, and seize opportunities for long-term wealth growth.
This article represents the views and opinions of the author, aimed for general informational purposes only and not for recommending or soliciting any actions. The Epoch Times does not provide investment, tax, legal, financial planning, real estate planning, or other personal financial advice. The Epoch Times does not guarantee the accuracy or timeliness of the content.