Your portfolio should include a mix of investments, assets, savings, accounts, and funds. Liquid cash is one of these important components, but it can easily be overlooked and become unbalanced. An important question to ask, then, is how much cash should you have on hand? To help you find the right amount, here are a few things to know about the function of each form of cash in your overall financial plan.
Should you keep any amount of physical cash, such as dollar bills, in your possession? The answer is yes, but on a limited scale.
The most important reason to keep some actual greenbacks handy is in the event of a natural disaster or emergency. What would you do, for instance, if an ice storm knocked out power to local banks and ATMs? Many people prefer to keep enough cash in a safe to manage for several days in an emergency. However, too much cash kept in your possession makes you a higher risk for theft and leaves you underinsured.
Cash in the Bank
Savings and checking accounts are a much more common way to hold liquid cash today. Many experts recommend that each household keep enough cash in a high-interest checking account to cover at least one month's bills, in order to help smooth any income hiccups. Beyond that, high-yield savings accounts are excellent places to keep between three and nine months' worth of expenses as an emergency fund.
Placing cash in an insured bank keeps it safe, which is the most important part of building an emergency fund. This is not a time to seek higher rates of return through increased risk or long-term investment tie-ups.
However, the fact that they often offer the lowest interest rates means you shouldn't let your bank accounts grow too large. Analyze your income and expenses, then decide on a threshold for bank accounts. Invest the excess when it reaches this threshold.
Cash equivalents are investment instruments that are liquid enough to serve a purpose similar to actual cash. These generally include instruments that mature in less than a couple of days — things like certificates of deposit, short-term bonds, Treasury bills, and money market funds. Although cash equivalents do require some effort to redeem, they may sometimes be used to replace part of your emergency fund.
Cash reserves within your investment portfolio should be carefully monitored to keep them at a reasonable level. Ready cash reserves you can tap at any time to jump on an investment opportunity are a smart move for the seasoned investor. However, you may or may not receive much return on these reserves, so they shouldn't get too large.
Consider keeping a specific percentage of your investment portfolio in handy cash. If you don't maintain a full emergency fund elsewhere, you may want to make this a larger percentage. If you don't need to cover personal or business emergencies, reserves can be smaller.
Precious Metals and Currency
Finally, should you keep any hard currency as an investment? This depends on each investor. Some individuals like having precious metals, bullion, coins, and other hard currency that can be held, traded, stored, and seen. And precious metals can help you hedge against market changes since they have different cycles. But, as with physical dollars, too much currency could open you up to theft and damage.
Where to Learn More
Want to know more about managing the cash and cash-like instruments within your portfolio? Start by meeting with the financial planning team at Presidio Wealth Management. We will help you assess your portfolio's balance, your preparedness for emergencies, and your investment goals to find the right mix. Make an appointment today.