Even your cash should be working for you.

In an old piece, I covered cash reserves or emergency funds as some like to say. I want to revisit that today and I’ll start with a quick overview on why a cash reserve is so important.

I hate general rules of thumb, but generally speaking, people should aim to have some multiple of their monthly expenses saved as cash at all times. Usually, this is between 3-12 months, and it will depend on how someone earns income. Are your earnings consistent? Are you a business owner? Are you paid commissions irregularly? Do you have a spouse? These all factor into how much cash should be on hand.

Now, the reason why it is so important to have this cash is that it serves to assist you in times of need or in times of opportunity. It allows you to invest regularly without hiccups because you can lean on this reserve for unexpected expenses. Life has a funny way of throwing the kitchen sink at us every now and then. Usually, when it rains, it pours. A sound cash reserve will allow you to sleep well at night knowing that you can handle anything that comes up.

It also allows us to leave our investments be. No one wants to be selling assets to cover an expense. When it comes to selling assets, we want control around when we sell them. Your cash reserve allows your investments to compound without interruption.

Now that we reviewed why a cash reserve is so important, let’s get into something I have seen regularly with young professionals.

They are holding their savings in a traditional savings account. This usually means that their cash reserve is yielding them just above nothing. The average savings account yield is currently .57% according to Bankrate. 

We are living in a high-rate environment right now. We don’t have to get into the nitty-gritty of that whole situation right now, we’ll save that for another time. But one of the positives of a high-rate environment is that savers are now able to generate significant yield on their cash.

There are high-yield savings accounts that are offering 5% APY (annual percentage yield)!!! There is a massive spread between the national average rate and what high-yield accounts are offering. Other cash equivalent instruments include money-market funds and your good old Treasury Bills. 

A balance of $10,000 at .57% APY will generate $57 over the course of a year. At 5%, you’re generating $500 over one year. This yield is meaningful, it is some of the lowest-hanging fruit at this point in time. Most high-yield savings accounts make it incredibly easy to move money from your traditional account as well.

When searching for a high-yield savings account always ensure that they are FDIC-insured and reputable. As always, this piece is for informational purposes only, please seek the advice of a financial professional for advice on your individual situation!

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Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!