The 3 Things You Should Consider Doing with Extra Cash Right Now

By: Scott Sturgeon, JD, MBA, CFP®

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With markets in a state of near-constant volatility, interest rates (and by extension yields) on the rise, and the potential for a recession looming, where is a good place to invest extra cash right now? Should you simply keep it in a checking account? Maybe a high interest savings account? Are I Bonds or other Treasury products a good fit? What about CD’s? Whether it’s $100,000 or $1,000,000, the answer to these questions is going to be highly contingent on your individual financial situation, but this article focuses on a few considerations in deciding where to invest extra cash right now.

1. Cashflow Planning for Beginners

2. Asset Allocation

3. The Risk Conversation

 

Cashflow Planning for Beginners

The first question to answer in deciding what to do with cash right now is, what do your cashflow needs look like? If you’re still working, it’s good to keep roughly 3-6 months’ worth of expenses in the form of cash at any given time. With interest rates on the rise, it probably makes sense to keep a portion of that amount in a high-yield savings account. In the event you lose your job, need to take time off, or have a large one-time expense, having that cash buffer will prevent a cash crunch and having to resort to taking on high interest debt like credit cards or personal loans to cover expenses.

If you’re retired, the rules change a little bit. Again, how much cash you should have on hand is going to be dictated by a combination of your expenses, income, and your investment accounts. Unlike someone who is working and getting paid consistently throughout the year though, retirees are generally more reliant on their investment portfolios and other fixed income sources to support their lifestyle. Since taking portfolio withdrawals in a down market is less ideal than making withdrawals when the market is up, ensuring you have a cash buffer is important. In general, it’s good for retirees to have at least a year’s worth of expenses covered by either cash or fixed income sources like social security or a pension.

Once your baseline amount of cash that you should hold has been established, the question then arises, ‘what should I do with extra cash right now’? For example, if you’re retired and your annual expenses are $200,000 each year, what should you do if you have $500,000 or more in cash right now? That’s going to depend on several factors, the largest of which will be how that cash fits into your overall asset allocation and how much risk you’re able to take on in the process.

 

Asset Allocation

When deciding what to do with extra cash, it’s important to understand how those surplus funds will factors into your overall asset allocation. A good analogy for explaining your asset allocation is to think of a pie composed of lots of different slices. Each of those slices represents a different type of asset or investment class, the sum of which comprises how you’re invested overall. Whether it’s real estate, taxable brokerage accounts, your 401(k), an Individual Retirement Account (IRA) or any other type of investment asset, how you put excess cash to work is going to be partly dictated by the composition of those other assets.

Drilling down even further, within each of those types of investment accounts or assets, you may have individual investments like stocks, bonds, mutual funds, exchange traded funds, certain types of real estate, businesses, etc. Understanding how those individual investments relate to one another is crucial to avoid over-concentrating in any one type of investment.

For example, if you own stock in the large company you work for or an ownership stake in an apartment complex, that may impact how much your 401(k) or taxable brokerage account should be allocated to large-cap stocks or real estate investment trusts (REITs) focused on apartment complexes.

Why is it so important to ensure your investments are diversified across different asset classes when putting any extra cash you may have to work? It has a lot to do not only with the overall returns you anticipate from those investments, but perhaps more importantly, the total amount of risk you’re actually subjecting yourself to in pursuit of those returns.

 

The Risk Conversation

When you think about investing and how investments are measured, your mind probably first goes to returns. What amount of income should a given investment generate? How much should you expect your investment to grow over time?

While these kinds of questions are important to consider, the topic that should be receiving just as much attention is the amount of risk associated with a given investment and how that corresponds to the amount of risk you’re exposed to overall. Any investment you make is going to have inherent risk, whether it’s investing in the stock market or buying bonds, there is always risk present. Even holding cash has the potential for risk in the form of opportunity costs and succumbing to the impacts of inflation.

Accepting that all investments have risk, weighing that risk is even more important when putting extra cash to work because you’re balancing not only cashflow needs in the present and future, but also the overall amount of risk your investment portfolio is exposed to. When you’re younger and have full time employment, this isn’t as important since your likely able to overcome any kind of cash shortfall being paid every two weeks. For those who are retired though, it’s critical to incorporate risk as part of your financial planning process to help dictate how risk is going to affect your asset allocation.

Ultimately, the answer to how you should put your extra cash to work is going to be entirely contingent on your individual financial situation. In a down market, it may be an opportune time for you to invest in equities, gaining exposure to the stock market but simultaneously taking on more risk. Conversely, you may already be taking on too much risk, so any extra cash should go towards building your cash reserves or seeking fixed income investments with higher yields and lower volatility.

If you’re struggling with how to put extra cash to work, consider scheduling time for a quick 15-minute consultation around your personal financial situation. We’ll discuss how any extra cash holdings you may have could be utilized in working towards your larger financial goals and how Oread Wealth Partners can bring value in pursuing what’s most important to you.

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