Despite Low Interest Rates, Keep Cash on Hand

April 14, 2014

With interest rates at ultra-low levels today, clients often ask us how they can get their cash, in checking or savings accounts, or bank certificates of deposit, to “work harder for them”.  In fact, we were recently speaking with a new client about how to arrange her finances after her divorce settlement.  One of the items discussed was how much cash to keep as a liquid emergency fund.  Since she had a stable job and modest expenses, we suggested 3-4 months worth of expenses as a contingency fund.  If something came up, she wouldn’t have to dip into her longer-term investments accounts.  She frowned at this idea, sniffing that, checking accounts “weren’t paying anything” and she was “losing” by keeping too much in cash.

Having ready cash is a core for short-term goals and liquidity, (as well as a measure of risk-management) is a key concept in effective financial planning.   The client above may have opted to commit all but a small amount of cash to something less liquid in the name of squeezing out a percentage more in earned interest.    All well and good, but for the relatively insignificant amount of interest earned, there could be a greater penalty in the form of illiquidity and the absence of ready cash if something unseen and unexpected occurs.

We see this all the time in our daily lives.  The car breaks down and needs an expensive repair (just when we’ve committed to paying down the credit card(s)), the old washer gives up the ghost and needs to be replaced, or how about a heavy rainstorm that unexpectedly causes rivers to flood and your basement is now a swimming pool?  Certainly would be a good time to have some cash to fix any of these issues.

Job loss and outsourcing is all too common today.  Your employment may be secure for the moment, but corporations and small businesses alike have discovered that “lean and mean” is the way to go today to keep profits growing, so many formerly secure jobs are in jeopardy or whole divisions are being consolidated.  With the job market still tenuous, having several months of cash to pay the bills and buy groceries could be the difference in your family’s financial life.

Low interest rates are tough on savers, but remember that a main purpose of ready-cash is to provide security and keep your financial ship afloat and sailing forward during rough seas.