With short-term interest rates still at the highest levels in the past 15 years, managing your cash wisely is more important than ever. Essentially, good cash management involves finding a balance between having enough liquidity for your cash flow needs and generating a reasonable return on your cash. As you fine-tune your cash management strategy, watch out for these common mistakes:
Holding Too Much Cash
A common mistake many people make is holding too much cash. While having an emergency fund is essential, a good rule of thumb is to save enough just to cover 6 to 12 months of expenses. Of course, there may be exceptions if you’re anticipating large purchases, such as a new car or a big trip, but the 6 to 12-month rule is a helpful guideline for most situations.
Also, be aware of how much money you have in any one bank. The FDIC currently only insures up to $250,000 per person or $500,000 for joint accounts with a significant other. While the probability of bank failures is typically low, why take the risk, right? Being aware of these limits can help protect your hard-earned savings.
Not Taking Advantage of High Interest-Bearing Accounts
Another common error is keeping money in low interest-bearing accounts, like checking accounts, instead of moving it to higher interest options like money market accounts, money market mutual funds, or Certificate of Deposits (CDs).
Consider moving excess funds into savings accounts or money market accounts, which often offer better interest rates. These accounts are readily available, and thanks to today’s technology, there are often straightforward ways to access these funds if you need them in a hurry.
Investing Too Much in CD’s
While CDs can offer higher interest rates, there are a few things to keep in mind. Before investing in a CD, be sure to understand the contract terms and any penalties for premature withdrawal, as these can erode the gains you might have made.
CDs are not very liquid, meaning you can’t access your money easily if you need it quickly. To avoid tying up too much of your cash, consider investing your money in other ways as well.
It can be helpful to have a balance between money market accounts, money market mutual funds, and CDs to maximize your risk-free yield without leaving yourself vulnerable to a short-term liquidity need.
For more helpful content delivered directly to your inbox, sign up for our newsletter at the bottom of the page.
Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC [“Welch”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Welch is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Welch’s current written disclosure and Form CRS (Customer Relationship Summary) discussing our advisory services and fees is available for review upon request or at www.welchgroup.com. Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.