Updated: Jul 30, 2020
Uninvested cash may feel more readily available compared to when it's invested, but there can be better ways to manage your funds. Find out how.
Uninvested cash typically loses its purchasing power when kept out of the market-- but maintaining the wealth you have, and being able to access it, are paramount.
Low-risk, short-duration financial products can often offer a higher yield on cash as compared to traditional checking and savings accounts, while helping to keep risk minimal.
Betterment can help with its suite of products such as Cash Reserve, Two Way Sweep, and cash management advice.
So far, we’ve told you about the consequences of having uninvested cash in your investment portfolio. But cash is king, and so even the most savvy investors still keep money in places like checkings and savings accounts in order to have easy access to those funds, which then can be used for day-to-day expenses. What Is “Idle Cash”?
Idle cash is money that is not invested in anything and is therefore not earning investment income. It’s money that is not actually participating in the economy– not being spent on anything and not increasing in value. Therefore, it can’t earn you anything.
Ultimately, keeping idle cash on hand is simply not as beneficial as you may think. In fact, these funds are frequently considered wasted, as they typically cannot keep up with the effects of inflation. In the U.S., the inflation rate that the Federal Reserve targets is 2% annually— given that your idle cash likely does not increase in value, its purchasing power actually decreases as time passes.
That’s right—uninvested funds gradually lose value, since they are unable to keep up with the rate of inflation, which means that as time goes on, the $100 under your mattress can eventually only buy $98 worth of things, then $96, then $94, and so on. And that’s just inflation—the opportunity cost of keeping cash that you otherwise could invest in the market is even worse.
Why do people keep uninvested cash?
Despite the fact that keeping idle cash can be detrimental to a successful, long term savings plan, there are still plenty of reasons for people to keep cash on hand.
Accessibility and liquidity are huge factors—investors want to be able to pay their bills from their checking accounts with the click of a button, for example—as is safety and security, and the fact that savings accounts from member banks are FDIC-insured.
The current reality is that among the checking and saving accounts out there, the return on deposited funds is very low. In fact, the FDIC announced that as of February, the average yield on a savings account is 0.09% APY—in a 2% inflation environment, this is still a purchasing power losing investment. The yield on checking accounts is even worse—most of these products have very low interest rates.
How much uninvested cash can I get away with keeping?
While a small portion of uninvested cash may seem insignificant, it can be disadvantageous for at least two reasons:
Preventing it from keeping up with inflation rates means your cash loses value over time, and
You fail to benefit from money that can compound over time and garner even higher returns.
Why not put your money to work? Although Quest Education does not place your investments or give investment advice, we can review your account and provide you with the resources and education that align with your goals.
[Article by Ming Jia]