Cash Rules Everything Around Me….
As a rule of thumb, it can be helpful to maintain some savings for a rainy day. During times of high anxiety, it can be reassuring to know that you have a few months of breathing room just in case you are suddenly unemployed, there is an unaccounted for expense at home, or you are unable to work due to COVID.
But how much is too much? Financial planners will frequently recommend a three to six month of income buffer. What we have witnessed some of recently is individuals with two to three years or more of cash on hand. The main issue with this can be easily highlighted if we look at the treasury.gov website to get a feel for real yields on treasuries.
The real yield looks at what you would receive from a treasury after factoring in inflation. On a five year treasury, it was at -1.34% on 12/2/2020. So it is almost impossible to maintain your purchasing power by keeping your money in a CD or treasuries and with each passing day while cash in your bank account provides you with comfort to sleep at night, it also comes at a cost.
For those who are in this very fortunate situation, they can consider contributing more to their retirement plan at work. If they are capped out on what they can do there, they can set-up a taxable account and save in a globally diversified portfolio that is managed in a cost effective way. There are many options this individual can pursue but maintaining large sums of cash relative to what you make comes at a cost too.