According to the Investment Company Institute, near the end of 2022, there was more than $4.7 trillion in cash sitting in U.S. money market funds.1,2
While cash can play a role in a diversified portfolio, historically, cash has not kept pace with inflation. This means that dollars held in cash may lose purchasing power over time as prices rise.
In a diversified portfolio, cash can help reduce portfolio risk, provide stability, and be available for short-term needs. But it's important to remember that even a diversified portfolio does not eliminate the risk of loss if security prices decline. Diversification is an approach to help manage investment risk.
After the stock market's performance in 2022, it's understandable that cash reserves have remained near levels since the 2020 recession. But before making decisions about your cash reserves, it's critical to ensure your emergency fund is prepared to handle unexpected expenses.3
Establish or reassess your emergency fund
The general rule of thumb is to put away three to six months' worth of living expenses in your emergency fund. Given the historically high inflation of 2022, it's worth assessing your emergency fund to ensure that it reflects the increased cost of living expenses. Your emergency fund should be easy to access, and you might want to consider keeping it in an account dedicated to emergencies.
How to approach credit cards
After funding your emergency account, you might want to turn your attention to high-interest debt, especially credit cards. The average annual percentage rate offered for new credit cards was 22.91 percent in December 2022. That was an increase from the prior month when the average stood at 22.40 percent. As the Federal Reserve has pushed short-term interest rates higher throughout 2022, the interest rate on credit cards has followed.4
If you’re comfortable with your credit card position and the amount of cash in your emergency fund, and you still want additional cash reserves, here are some choices to consider.
As the Fed has raised interest rates, savings accounts are now paying higher rates. Consider checking with your current bank to see what they are paying. The Federal Deposit Insurance Corporation (FDIC) insures bank accounts up to $250,000 per depositor, per institution, in principal and interest.
Certificates of Deposit
Certificates of Deposit (CDs) offer a fixed interest rate typically higher than what you can get in a bank savings account. In exchange for a higher rate, CDs are offered in different maturities, such as one-year, two-year, and five-year terms. Keep in mind that if you need to take out your money before the term ends, you must pay an early withdrawal penalty. Like a savings account, the FDIC insures certificates of deposit up to $250,000 per depositor, per institution, in principal and interest.
We are here to help
As financial professionals, we help clients prepare for short- and long-term financial goals. We help clients understand the role cash plays in a portfolio and can discuss the type of cash alternatives that are available. If you have questions, please don’t hesitate to contact us, and we can set up a time to review your cash strategy.
The content is developed from sources believed to be providing accurate information. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite, LLC, is not affiliated with the named representative, broker-dealer, state, or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.
1 ICI.org, December 15, 2022
2 Money held in money market funds is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Money market funds seek to preserve the value of your investment at $1.00 a share. However, it is possible to lose money by investing in a money market fund. Money market mutual funds are sold by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.
3 Fred.StLouis.org, December 9, 2022
4 LendingTree.com, December 13, 2022. Lending Tree explains that most credit card issuers don’t offer one rate to everyone. Issuers offer a range of possible rates based on whether you have good or bad credit. The better your credit, the lower the rate you can typically expect. But that’s not guaranteed as issuers consider various factors when approving you for a new card account.
5 Treasurydirect.gov, 2022