Cash has been demoted as a financial wealth-building tool. Current interest rates and savings account yields don’t stack up when measured against historical rates. Throughout the 1990s, you could earn around 5% on a money market or savings account held at your bank. Yields were close to this as recently as 2007. Then, the Great Financial Crisis hit, and yields have been in the penalty box ever since.
Here’s what the annual payout would have been on $100,000 in savings over time:
- • 1996: $5,000
- • 2000: $6,000
- • 2006: $4,500
- • Now: $280
Balancing Cash as Liquidity
There’s a fine line between maintaining sufficient cash and having too much liquidity. When determining what your preferred level of savings is – including cash accounts in your local financial institution as well as money markets in your investment accounts – keep the following in mind:
- • Today’s paltry yields don’t come close to covering taxes and inflation
- • The goal of cash holdings is to provide liquidity for both the known and unknown
- • Cash isn’t intended to grow, and does not grow; that’s what investments are for
- • Anything held in cash will be reduced by inflation over the longer-term
- • Accumulating too much cash (especially in checking accounts) makes it far easier to spend money that doesn’t necessarily need to be spent
We recommend maintaining sufficient cash to pay your bills, address unforeseen expenses like car repairs, and (when the pandemic is over) to enjoy a night out on the town or an occasional vacation.
If you have questions about how much cash to keep, please do not hesitate to contact me or the office directly.
We’re here to help!