Spectrum of opportunities to needs
Once specific cash flow needs (liabilities) are identified, it becomes easier to determine the appropriate options for investing available cash. In this way, cash does not have to be viewed as a category where all money is directed to the same vehicle. Greater efficiencies can be found by matching the timing of liabilities to the most suitable available options for those liabilities. Typical cash flow needs and the appropriate solutions generally fall into three categories:
Immediate cash
Liabilities that must be met within 90 days indicate a need to keep cash in an extremely liquid state. The primary focus is to maintain principal. Some banking products offer FDIC insurance1 to help assure the security of the investor’s cash. Another important factor to consider is how easy an institution makes it to access cash, including a broad network of ATMs. Options include:
Checking accounts (FDIC insured)
Money market savings accounts (FDIC insured)
Money market mutual funds
Commercial paper
U.S. Treasury and agency securities
Short-term needs
In some cases, expenses may be identified but cash will not be required to meet these liabilities for a period of time, beyond 90 days but within nine months. This allows the flexibility to seek higher yields without taking significant principal risk and still maintaining sufficient liquidity to meet specific future liabilities. Considerations include:
Certificates of deposit
Short-term U.S. Treasury and agency securities
Commercial paper
Long-term cash needs
Some money should always be invested when principal is relatively stable and assets can be liquidated to either meet emergency needs for unplanned expenses or as part of a broader asset allocation strategy for a portfolio. Planned expenses such as the purchase of a vacation home, an upcoming tuition bill for college or funding for a small business are future liabilities that may be planned for well in advance. Alternatively, there may be a need to maintain a portion of a long-term portfolio in low-volatility investments. There is principal risk, but these are typically identified as relatively stable investments. Considerations include:
Short-term bond mutual funds
Intermediate-term bond mutual funds
Certificates of deposit
Conclusion
There are no cookie-cutter strategies when it comes to building a personalized strategy for effectively managing your cash. Individuals are not well served by simply chasing yield or settling for a lower yield. In fact, the more holistic approach is to take a view of your entire financial situation to help determine:
The most appropriate role for cash in your financial strategy.
A schedule of liabilities that will require access to funds in the short, intermediate and long term.
Because of frequent market changes and changes to your own objectives, it is important to review your financial strategy with a trusted advisor at least annually.
