There is something about seeing a big number in your bank account that can give you a sense of pride and security. Although having a big safety net of cash in your savings or checking can provide peace of mind, did you know that you are exposing your money to risk? Because you likely earn little to no interest on your savings, you risk losing your purchasing power, as your cash will not keep up with inflation.
When you have more cash sitting in your bank accounts than you need, you are not maximizing its potential. But if you put your idle cash in play, you are giving your money the opportunity to bring in returns and increase your overall wealth.
Origins of Idle Cash
Idle cash can build up in a variety of ways. Young professionals earning more money than they are used to can let cash pile up in their savings because they don’t know how to make it work for them. Experienced investors may not even realize they have idle cash sitting around from dividend payouts that aren’t automatically reinvested. Cash from passive revenue streams, such as rental properties, may not be integrated into your investment portfolio and could be actively dragging down your return potential.
Regardless of where the cash is coming from, having too much of it idle in your portfolio is not a wise financial strategy. There is no right number and it is different for every person and family, but we believe one should have a cash contingency target to keep in reserves based on your unique circumstance. Other than this backup cash, the amount of idle money in your portfolio should be limited, with additional funds being productively put to work.
Stay on Top of Your Accounts
Do you know how much idle cash you’re carrying? You may consider the money you put into mutual funds as being invested, but did you know that these funds usually keep about 5% of the portfolio in cash and cash equivalents? (1) Evaluate your portfolio as soon as possible, because the excess cash sitting in your savings is losing the fight against inflation.
Inflation has increased costs, and the value and purchasing power of $100 today is very different from that of 30 years ago. Cash has a near-zero expected return, so holding on to excess cash for the long term is effectively minimizing the potential upside of your hard work. What can you do with the extra cash? How do you reinvest it so you maximize its return?
A Better Alternative
At JGP Wealth Management, we strive to find the best way to put your money to work and ensure your investments align with your current needs and future goals. Whether you are saving for your child’s education, strengthening your retirement accounts, or wanting to purchase a new home, we want to see your investments reach their potential.
The cash that’s accumulating in your checking or savings account yields little to no interest, so if you need cash readily available, consider investing in short-term securities. These types of investments can be liquidated in less than a year but earn better returns than money collecting dust in your savings account.
Municipal bonds, real estate, and savings bonds are all excellent long-term investment options if you’re in a position to limit access to your funds for an extended period of time. These types of investments require commitment but can be lucrative if held until maturity.
How We Can Help
If you think your portfolio is cash-heavy, we can help. Our team can show you the potential returns that could be lost by holding cash long-term. We also assess your portfolio allocations to help you determine the most prudent investment strategy to leverage maximum profits from your cash.
You may not realize it, but holding on to idle cash can significantly impact your bottom line. If you think idle cash might be affecting your return potential, reach out to us by emailing [email protected] or calling 503-446-6450.
