Cash is an important component of any financial plan. It can be an evergreen part of a holistic strategy, providing liquidity for bill paying, a source of funding for near-term liabilities, or a more strategic, longer-term purpose. With this in mind, it’s important for investors to understand how much cash they have and where it’s held, how much it’s yielding and the role it plays in their overall wealth plan.
Investors now have numerous options to earn meaningful yields on their cash balances. But a comprehensive approach to managing liquidity extends beyond choosing the highest yields. Individuals should also consider liquidity, security, and the appropriate account location.
Before determining how much cash is right for you, it’s helpful to think about when and how you will use it. We consider cash and cash alternatives in three distinct buckets: Operating Cash, Planning Cash and Strategic Liquidity.
Operating Cash is intended for the payment of day-to-day living expenses. It typically has daily liquidity and a lower yield than longer-term cash buckets.
Planning Cash is intended to cover recurring and known expenses within the next 6-18 months. Daily liquidity is generally available, but the money can be subject to early withdrawal penalties and market volatility, and yields exceed those on Operating Cash.
Strategic Liquidity is intended for more permanent uses of cash held over periods exceeding 18 months. It has the lowest liquidity and highest yield of the respective cash buckets.
While cash investments are generally considered lower-risk investments compared to stocks or bonds, there are still several risks associated with them. Unlike financial securities which fluctuate in market value, cash deposits are intended to maintain their nominal value. Let’s take a look at how several cash options are subject to liquidity risk (the ease at which an asset can be converted into cash), credit risk (the possibility of default on obligations) and interest rate risk (the potential for losses due to a move upward in interest rates).
Notes: Bank Deposit Programs may be susceptible to illiquidity; MMFs could potentially implement liquidity fees or redemption gates during adverse market conditions.
It is important to carefully consider the risks associated with cash investments and balance them with potential returns and investment objectives.
As noted in the table above, BNYM N.A. deposits are eligible for FDIC insurance up to $250,000 per depositor and $500,000 for joint accounts. Additional information on FDIC insurance can be found here. Furthermore, the regulatory nature of being classified as a Globally Systematically Important Bank (GSIB) requires BNY Mellon to maintain leverage and liquidity ratios in excess of banks with fewer than $250B in assets. Our company is consistently ranked among the top financial firms with strong external credit ratings. Additional information on our credit ratings can be found here.
On a periodic basis, all investors should evaluate their liquidity needs within their total wealth plan. This is an element within our Active Wealth approach, our comprehensive framework that helps investors build and sustain wealth. Doing so can help ensure you have the right balance of being able to meet your short-term liquidity needs, while maximizing your portfolio’s long-term performance.
This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not in-tended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.
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