By Adam K. Wright, CFA®, CFP®
If your savings account is building up week after week and month after month, you probably feel a sense of financial security every time you glance at your balance. But have you ever stopped to think about whether that money could be silently slipping away?
Idle cash, the money that sits untouched and uninvested, might be costing you more than you realize.
Let’s dive into the concept of idle cash and discover how you can make your money work harder for you.
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 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 reserve target 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.
Even your cash reserve can be placed in a high-yield savings account, helping you earn more. Ask us how we can help with our new FDIC cash sweep program, Flourish Cash. Currently, Flourish Cash is paying 4.65% APY on the first $500,000 in an individual account and $1,000,000 in a joint account.
Stay on Top of Your Accounts
Many banks have been slow to adjust interest rates on savings accounts. A standard savings account may pay next to nothing while a high-yield savings account could be paying much more. For instance, take PNC; the difference is as much as 4.64% APY according to bankrate.com. If you’re not in the right account, you could be missing out!
Additionally, at Schwab, cash is swept to FDIC-insured accounts. But they are only paying 0.45% APY. While we help clients sweep to higher-yielding money market funds and to Treasury bill funds, outside accounts with cash may not be earning much at all.
To compare what your idle may be offering, here is what Schwab lists on their website:
Not more than a year ago, interest rates on cash were basically zero. Now that $100,000 in the bank could be earning as much as $5,000 per year, and with price-increase emails coming in every day, extra earnings on idle cash can go a long way in fighting inflation.
Inflation has increased costs, and the value and purchasing power of $100 today is very different from that of 30 years ago. Even with rising interest rates, idle cash is still not earning nearly enough to effectively combat inflation and 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
Our Wright Associates team members strive to find the best way to put your money to work and align your investments with your current needs and future goals. Whether you’re saving for your child’s education, strengthening your retirement accounts, or planning to purchase a new home, we want to see your investments reach their potential.
It’s important to understand there are more efficient ways to handle cash than simply stockpiling it in a checking or savings account. If you need liquidity but still want to put your cash to work, 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. The Schwab money funds noted above can be transacted daily and are generally not subject to market risk. For example, $100,000 goes in, and $100,000 comes out plus interest.
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. The same is true of certificates of deposit. They require waiting, but also deliver stable interest over time. These types of investments require commitment but can be lucrative if held until maturity.
How We Can Help
If you have cash in the bank, consider putting it to work. Together we can explore investment options that align with your risk tolerance, consider high-yield savings accounts that offer better returns, or diversify your portfolio to spread the risk.
By taking control of your idle cash and making it actively work toward your financial goals, you can feel confident that every dollar has a purpose and that you’re not losing money unknowingly. Wright Associates is here to help. To learn more or to get started today, schedule a complimentary phone call.
Adam Wright is a CERTIFIED FINANCIAL PLANNER™ professional at Wright Associates, helping clients plan and prepare their investments to retire on their terms. If you’re serious about planning for your retirement and investing for your future, his annual process will help you make the right money choices today. Therefore, Adam and his team will proactively manage your accounts while communicating the progress of your financial plans. He believes the retirement advice you receive should be intentional and actionable.
Adam has a Bachelor of Science in Supply Chain and Information Systems from The Pennsylvania State University and a Master of Business Administration from University of Pittsburgh, Katz Graduate School of Business. He lives in Upper St. Clair with his wife and two children. When he’s not working, Adam enjoys the outdoors (fly fishing), reading, and taking long runs while listening to a favorite podcast. He’s also currently encouraging himself to take up golf. To learn more about Adam, connect with him on LinkedIn.