One of the most common questions I hear is “How much cash should I maintain?” I encourage Tilly clients to save lots of cash because cash is needed for emergencies and you need cash to make smart investments when good deals arise.
Reasons We Don’t Maintain Cash
Most people don’t maintain adequate cash because they consider their retirement accounts (401-K plan at work, IRAs, Roth IRAs) as savings. In fact, this form of savings cannot help in the short-term without a stiff penalty. Furthermore, based on the fact that the financial industry gets paid when people invest, there’s a bias for “advisors” to persuade clients to invest in stocks and mutual funds instead of saving cash.
Our blog posted in July, “Cash is King So Keep Plenty of It,” I discussed why keeping cash is so important.
Here are 4 Tips for Saving More Cash
Tip 1: Strive for keeping cash worth 6-months of living expenses:
If you spend $3,000 per month, you should maintain $36,000 in cash. Easier said, than done, but this is the standard and a reasonable goal to strive towards.
Tip 2: Automatically save cash out of your paycheck:
For most people, 100% of their paychecks after taxes and benefits go directly into their day-to-day checking accounts. Instead, set up a percentage such as 2%, 3%, or 5% or even 10% to go directly into your money market or savings account.
Tip 3: Don’t over-invest in stocks and real estate:
The tendency is to buy too many stocks and mutual funds. People are falsely optimistic that their non-cash investments (i.e. stocks, real estate) can easily be converted into cash when and if they need it. But the truth is, these investments all to often must be converted to cash at the least opportune time, like when losing a job because the economy is bad and therefore the stock market is down, resulting in a cash loss for people when they least need it.
Tip 4: Get interest income on your cash balances:
If your cash doesn’t receive interest, over a period of time it will be eroded away by inflation. Banks don’t pay much if any interest, but if you’re willing to sacrifice FDIC-Insurance, you can buy low-risk money market funds that invests in short term government securities. Today, these accounts pay close to the rate of inflation, which is about 1.75%. The key is to invest in low risk money market funds — so don’t chase the highest rates. Here is a good explanation for money market funds, along with some suggested low-risk funds.
If you don’t yet maintain much cash, don’t get down because you aren’t alone. According to a study by the Federal Reserve and FDIC, the median American household maintains $11,700 in savings. The key is to start today to get ahead.
Tilly would love to help you create a plan to save cash today for as little as $65 per month. Contact us to learn more!