Too much cash in your bank account?
Believe it or not, it is not uncommon for a client to come to me and tell me that they feel like they have too much cash on hand in their bank account and don’t know what to do with it. When it comes to reallocating your cash, it is all about following your financial plan.
First, what is your goal for your cash reserve? I recommend that you keep between three and six months’ worth of your monthly expenses in a cash reserve. Not sure what that number is? Look at your paycheck to see how much you bring home each month. Then look at how much your account grows by each month or how much you put into savings. You are spending the difference. Multiply that number by either three or six.
Next, look at your tax advantaged investing options. The government only gives you so many tax advantaged opportunities. Be sure to consult with your tax advisor regarding these strategies. Are you putting the maximum into your 401k or other employer sponsored retirement plan? For 2020, the magic number is $19,500 pre-tax or Roth if you are under the age of 50. If you are over the age of 50, the limit is $26,000. In addition, depending on your employer, you may be able to make post-tax contributions as well. You’ll need to check with your HR department to see if this is available to you. Also, depending on your income, you may be able to contribute to a Roth IRA - $6,000 or $7,000 depending on your age in 2020. Finally, if you can’t contribute to a Roth IRA, consider contributing after-tax dollars to fund a traditional IRA. You’ll need to keep track of these contributions and you don’t want to co-mingle the funds with a traditional IRA that you made pre-tax contributions to. You may also want to consider converting the after-tax traditional IRA to a Roth IRA. There are very specific rules around this, so be sure to consult with your advisor prior to converting.
After you’ve funded your tax advantaged options, consider your mid-term goals – education, moving, purchasing a boat, buying a second home. Select an investment that has a time horizon that matches that of your goal. This is a liquid investment that you can cash in on at any time, but you don’t plan to.
Finally, consider investing more towards your long-term goals like retirement. These may be funds that have a penalty for withdrawing prior to age 59.5 like annuities. You may also consider investments that have a longer time horizon and as a result are more aggressive than the investments of your short and mid-term goals.
At the end of the day, it all comes back to your financial plan and investing for your future according to your goals.