If we complain about paying taxes, that typically means we are making money. If we lament the historically low savings rates at the bank, that typically means we have money saved. Good problems to have, right? Perhaps, but that does not mean we shouldn’t try to solve them. I think we would all agree that it’s possible to pay too much in taxes, but can we really have too much cash? It seems like a logical contradiction at first, like too much Graeter’s Black Raspberry Chip. (Did you know they have an Oreo version of that now?)
How to know if you are holding too much cash: If you have met a savings goal of 3-6 months of living expenses in a savings account, you are contributing to your workplace retirement plan at a good rate, and you’ve saved for future purchases such as a home or car, then what?
For what purpose is the surplus you may save over and above these goals? You may not know the answer yet, and that’s okay. What that may indicate is that the surplus is not likely going to be designated for a short-term goal that you can foresee. That longer-term timeline may allow you to accept some risk over time, and invest that surplus cash.
Why risk it? It’s safe at the bank! Your surplus savings may be safe from loss, but it is not safe from inflation. As everyday items get more expensive, as we are seeing now, those dollars lose purchasing power even though the balance remains the same. Investing also provides the opportunity to make a positive impact on those future goals like building wealth for retirement, education funding, personal or charitable gifting, legacy planning, or that thing you haven’t dreamed up yet. It’s about impact; maximizing the good you can do for yourself or for others. Sitting on cash can cause that impact to diminish over time.
When and how to invest surplus cash: In short, early and often. It is easy to be paralyzed when the market is at or near all-time highs, but the reality is that the market has spent the great majority of its history at or near all-time highs. My first manager at Nationwide would tell me, “timing the market rarely beats time in the market”. Investing on a regular, automated basis in smaller amounts helps take the emotion out of the equation.
There are several ways to put your surplus cash to work; retirement accounts within IRS limits, brokerage accounts, maybe even cryptocurrency (but maybe not, seriously). Speak to your financial advisor, or give us a call here at The Joseph Group to help determine the most appropriate and tax-efficient path for investing your cash.
Written by Nick Boyden, Client Advisor