It’s time to put cash to work
Suddenly, yield for liquid investments has increased—and it may help soften inflation’s bite.
KNOW MOREHow much cash is too much cash?
It’s a good idea to hold some cash on your balance sheet, but in this environment, keeping too much can be a costly mistake. The good news is that higher interest rates have made it easier to capture yield across a spectrum of options. But how do you figure out the amount of cash to potentially take advantage of rising rates, and still maintain the cash on hand you need? Listen to our audiocast for insights on how to manage cash today.
What’s the right amount of cash?
Dig deeper with Marc Seaverson on what this all could mean for your balance sheet and portfolio.
Do you have the right amount of cash on hand?
In times like these when inflation is rising, it’s smart to make sure you have enough-- but not too much-- cash on your balance sheet.
Holding too much cash over the long term can be very detrimental. Because it’s universally true that inflation erodes the true value of cash over time. It eats away at your purchasing power.
But, still, some liquidity is needed and wanted.
How much should it be? And what form should it take?
There is no one answer for everyone.
GBA Overview
First you need to identify your near-term , your medium-term and your long-term goals.
Depending on what these goals are--- you will begin to know how much should be earmarked for four different purposes. Think of it as putting funds into four different buckets.
• The first is your LIQUIDITY BUCKET. Those are the funds you can access quickly to pay for ongoing operating expenses, large purchases and opportunistic ventures. It’s also the cash you have on hand to serve as a sort of psychological safety net.
The other three buckets contain funds to maintain your lifestyle, create legacy and ensure growth across generations.
All are incredibly important. But today we are going to focus on the liquidity bucket for two reasons:
• First, because inflation is higher now and erodes the value of your purchasing power over time. So you’ll want to make sure you have only as much cash as you need.
• Second, to get a handle on what you actually need, it helps to think through the purpose of your cash and other liquid assets.
1. Operating expenses
So let’s talk about what we see as the four purposes of liquidity.
Number 1, you need it to pay for your OPERATING EXPENSES: your “day to day.”
To determine how much you need—and want—for operating expenses, you’ll have to calculate your family’s current annual spending or “burn rate.”
How much does it cost to keep you and your family going in the everyday? We’re talking about both your essential and discretionary expenses.
This is the cost of running your household, paying for the kids’ schooling, your family’s hobbies, entertainment, vacations and other fixed expenses.
We generally suggest that clients consider keeping on hand enough to cover one to five years of their annual burn rate. Everyone is different. But, typically, we see clients set aside three years’ worth of operating funds.
And we help them figure out how much, exactly, that really is.
Having this amount readily available can especially help in times like these, when markets are volatile.
It’ll help knowing that, even in a down market, you won’t have to sell parts of your investment portfolio to meet your lifestyle needs.
2. Psych safety net
Number Two – You want to figure out how much you want for your PSYCHOLOGICAL SAFETY NET.
This is the amount of cash that you have readily available to help you sleep well at night.
For some clients it’s just $100K, for others it’s 500K, $1MM –- or even more.
This amount of money does not have to be committed to any purpose. You just have to make sure you can really afford to keep it relatively idle--off on the sidelines.
3.Large purchases
The third number you want to figure out when tallying up how much to keep in your liquidity bucket is how much you need for LARGE PURCHASES.
This is the reserve earmarked for any big expenditures or financial commitments you have in the near term.
So, for example, you may be planning to buy a new home, boat or car. You may not know when you want to make these purchases, but you do want enough on standby so you’re ready to make a move.
Or, you may want to make a large charitable donation, either directly or through a structured giving program such as a Donor-Advised Fund.
Often, we work with business owners and real estate developers who have had a significant liquidity event. They may need to set aside funds for upcoming tax payments, which fall into this category as well.
4. Opportunistic uses
Last but not least is a category we think of as cash for OPPORTUNISTIC USES
This is the “dry powder” you keep close at hand so that you are able to take advantage when compelling investment opportunities arise.
Especially now, as the economy slows and the prices of some investments and real estate start to drop, you may see an interesting opportunity and want to be able to capitalize on it.
Summation
Once a client has a better understanding of each of these categories—Operating Expenses, Psychological Safety Net, Large Purchases and Opportunistic Uses—we help them check what their final cash number should be in the context of their overall balance sheet.
The idea is to help them make sure they are allocating enough, but not too much, to their LIQUIDITY BUCKET.
Given how volatile markets have been and how fast inflation has been rising of late, we recommend that you go through this LIQUIDITY TALLYING EXERCISE soon. And that you plan to check your numbers again in about six months to a year.
Talk to your J.P. Morgan team so you can take advantage of our financial forecasting tools that stress test a variety of “what-ifs” around the appropriate amount of cash you might hold. These tools allow you to “pre-experience” the short and long-term impact of holding different amounts of cash.
Conclusion
We also recommend that you take a good look at what you consider LIQUID.
Taking a moment to think through your needs and options can be fruitful. Clients even tell us it is liberating.
In these uncertain times, this is one way to help you gain an important measure of control.
We look forward to helping you make sure you have enough, but not too much, cash –and liquidity – on hand.
Do you have the right amount of cash on hand?
In times like these when inflation is rising, it’s smart to make sure you have enough-- but not too much-- cash on your balance sheet.
Holding too much cash over the long term can be very detrimental. Because it’s universally true that inflation erodes the true value of cash over time. It eats away at your purchasing power.
But, still, some liquidity is needed and wanted.
How much should it be? And what form should it take?
There is no one answer for everyone.
GBA Overview
First you need to identify your near-term , your medium-term and your long-term goals.
Depending on what these goals are--- you will begin to know how much should be earmarked for four different purposes. Think of it as putting funds into four different buckets.
• The first is your LIQUIDITY BUCKET. Those are the funds you can access quickly to pay for ongoing operating expenses, large purchases and opportunistic ventures. It’s also the cash you have on hand to serve as a sort of psychological safety net.
The other three buckets contain funds to maintain your lifestyle, create legacy and ensure growth across generations.
All are incredibly important. But today we are going to focus on the liquidity bucket for two reasons:
• First, because inflation is higher now and erodes the value of your purchasing power over time. So you’ll want to make sure you have only as much cash as you need.
• Second, to get a handle on what you actually need, it helps to think through the purpose of your cash and other liquid assets.
1. Operating expenses
So let’s talk about what we see as the four purposes of liquidity.
Number 1, you need it to pay for your OPERATING EXPENSES: your “day to day.”
To determine how much you need—and want—for operating expenses, you’ll have to calculate your family’s current annual spending or “burn rate.”
How much does it cost to keep you and your family going in the everyday? We’re talking about both your essential and discretionary expenses.
This is the cost of running your household, paying for the kids’ schooling, your family’s hobbies, entertainment, vacations and other fixed expenses.
We generally suggest that clients consider keeping on hand enough to cover one to five years of their annual burn rate. Everyone is different. But, typically, we see clients set aside three years’ worth of operating funds.
And we help them figure out how much, exactly, that really is.
Having this amount readily available can especially help in times like these, when markets are volatile.
It’ll help knowing that, even in a down market, you won’t have to sell parts of your investment portfolio to meet your lifestyle needs.
2. Psych safety net
Number Two – You want to figure out how much you want for your PSYCHOLOGICAL SAFETY NET.
This is the amount of cash that you have readily available to help you sleep well at night.
For some clients it’s just $100K, for others it’s 500K, $1MM –- or even more.
This amount of money does not have to be committed to any purpose. You just have to make sure you can really afford to keep it relatively idle--off on the sidelines.
3.Large purchases
The third number you want to figure out when tallying up how much to keep in your liquidity bucket is how much you need for LARGE PURCHASES.
This is the reserve earmarked for any big expenditures or financial commitments you have in the near term.
So, for example, you may be planning to buy a new home, boat or car. You may not know when you want to make these purchases, but you do want enough on standby so you’re ready to make a move.
Or, you may want to make a large charitable donation, either directly or through a structured giving program such as a Donor-Advised Fund.
Often, we work with business owners and real estate developers who have had a significant liquidity event. They may need to set aside funds for upcoming tax payments, which fall into this category as well.
4. Opportunistic uses
Last but not least is a category we think of as cash for OPPORTUNISTIC USES
This is the “dry powder” you keep close at hand so that you are able to take advantage when compelling investment opportunities arise.
Especially now, as the economy slows and the prices of some investments and real estate start to drop, you may see an interesting opportunity and want to be able to capitalize on it.
Summation
Once a client has a better understanding of each of these categories—Operating Expenses, Psychological Safety Net, Large Purchases and Opportunistic Uses—we help them check what their final cash number should be in the context of their overall balance sheet.
The idea is to help them make sure they are allocating enough, but not too much, to their LIQUIDITY BUCKET.
Given how volatile markets have been and how fast inflation has been rising of late, we recommend that you go through this LIQUIDITY TALLYING EXERCISE soon. And that you plan to check your numbers again in about six months to a year.
Talk to your J.P. Morgan team so you can take advantage of our financial forecasting tools that stress test a variety of “what-ifs” around the appropriate amount of cash you might hold. These tools allow you to “pre-experience” the short and long-term impact of holding different amounts of cash.
Conclusion
We also recommend that you take a good look at what you consider LIQUID.
Taking a moment to think through your needs and options can be fruitful. Clients even tell us it is liberating.
In these uncertain times, this is one way to help you gain an important measure of control.
We look forward to helping you make sure you have enough, but not too much, cash –and liquidity – on hand.
A Purpose Driven Strategy
Liquidity Bucket
It’s where your cash sits for:
- Payment of operating expenses
- A psychological safety net
- Large purchases
- Opportunistic dry powder
Lifestyle Bucket
This is the capital you should set aside to meet all your high priority cash-flow needs during your lifetime
Legacy Bucket
The wealth you want to transfer to your family or charities either during your lifetime or after your death
Perpetual Growth Bucket
For the capital you want to have grow in perpetuity
