In January 2012, I wrote about our “love/hate” relationship with cash. Almost three years later, we believe a quick refresher is in order. Starting in 2013, the FDIC insurance on bank accounts reverted to a limit of $250,000 per depositor at each insured institution. If you have higher amounts in your name at any particular bank (even if it is spread over different accounts), it is not covered by the FDIC at this time. We recommend using multiple banks, if necessary, to stay within the FDIC limits.
With our client accounts we use a money market fund that maintains FDIC insurance even if the balance is more than $250,000. Within the fund, deposits are split between different banks for each fund holder to stay under the $250,000 limit per institution. As long as interest rates stay similar between insured and non-insured money market funds, we will continue to use this type of fund.
As we approach 2015, low rates are still a strong incentive to “do something” with our cash. While inflation is showing signs of life, we are reminded that losing our purchasing power is the real cost of holding cash. With this being the case, why hold much of it at all? Our need for cash savings is basically two-fold: emergences and opportunities. Money emergencies happen. Having liquid savings helps avoid running up debt or selling investments in crisis situations. As for opportunities, we can be selective in the timing of major purchases and buying investments.
Finding the right amount of cash is important financially and emotionally. Holding a large amount will give us emotional comfort but end up costing us financially in the long run. Having minimal savings may maximize investment returns but add stress to dealing with unexpected cash flow needs. The “sweet spot” should allow us to sleep well at night without jeopardizing our long-term financial goals.
A simple discipline I recommend is to set a target amount for savings. As your cash levels move above that amount, transfer the extra into your investment accounts for new purchases. If you see a pattern develop, you may want to automate this process. For example, set up a monthly transfer of $500 to keep savings at the desired level. If your savings are shrinking below your target amount, you may need to reverse the process until your situation stabilizes.
To learn more about David S. Hunter, view his Paladin Registry profile.