Cash as a position

In short

You have probably looked at your bank balance and wondered if that pile of cash is doing you good or slowly doing you harm. It is a fair question, and asking it says something good about you. Cash is not a failure of nerve. It can be a real part of a plan, so long as you give it a job. Decide what each dollar is for, and how soon you will need it. Money for the next few years belongs somewhere steady. Money for the far future may need room to grow. Check what your cash earns today, compare it with the pace of rising prices, and adjust if the two have drifted apart.

The whole of it

What it is

A friend of mine once kept a coffee can of bills in his kitchen cupboard. He called it his peace of mind. He was not wrong to want peace of mind, and I never teased him for it. Investors use a fancier phrase for the same idea. They say cash is a position, meaning it is a deliberate share of your money, held on purpose, just like a share of stocks or bonds.

When people say cash here, they mean money you can spend or pull out quickly with no risk of a price drop. That includes a checking account, a savings account, a money market deposit account, a certificate of deposit, and short term Treasury bills. A money market fund is a little different. It is an investment fund that holds short term debt, and it can lose value in rare cases, though it aims not to. The label on the account matters, so read it.

Holding cash as a position means you chose the amount. You did not just let it pile up because you were busy or unsure. That small shift, from drifting to deciding, is the whole difference.

How it works

I once watched a neighbor stash money for a roof repair. Each month, the balance sat there, and each month, she knew exactly why. That is cash doing its job. It waits, it stays put, and it is there when the bill comes.

Cash does three things well. It covers surprises, like a car repair or a gap between jobs. It covers planned costs coming soon, like a tuition bill or a down payment. And it gives you calm, which lets you avoid selling other things at a bad moment just to pay a bill.

Cash also has a cost. Prices tend to rise over time, and that is called inflation. If your cash earns less than inflation, each dollar buys a bit less next year than it does today. You did nothing wrong. It is simply how money and prices move together. Money left in cash for many years can lose buying power, while money placed in growth investments carries the risk of losing some of its value along the way. Neither path is free. Each has a price, and you pick which price you would rather pay.

So the question is never cash or no cash. It is how much, and for what.

The numbers, and where to find yours

If you are holding a balance right now, three numbers tell you most of what you need. The first is the interest rate your account pays. Your bank shows this as an annual percentage yield, or APY, which is the yearly rate after counting interest on interest. Look on your statement or your bank's website. The second is the rate of inflation. The Bureau of Labor Statistics publishes the Consumer Price Index, and its website shows the latest yearly change. The third is the rate on short term Treasury bills, which you can see on TreasuryDirect.gov, run by the Treasury Department.

Place them side by side. If your APY is below the yearly change in the Consumer Price Index, your cash is losing buying power. If it is above, you are keeping pace or better. The current inflation rate is the current figure, which the official source publishes each year, and the current Treasury bill rate is the current figure, which the official source publishes each year. The site fills in each figure with its source and date.

One more number worth knowing is deposit insurance. The FDIC insures deposits at member banks up to the current figure, which the official source publishes each year per depositor, per bank, per ownership category. Credit unions have a similar cover through the NCUA. Check that your bank is a member, and check the limit, because it protects your cash if the bank fails.

A worked example

I have a fondness for a woman I will call Maria. She is fifty two, earns 52,000 dollars a year, and keeps 30,000 dollars in a checking account that pays nothing. She told me she felt safe there, and I understood that feeling.

Maria and I sat down and did the sums together. First, her monthly costs run about 3,500 dollars. She wanted six months of costs set aside for emergencies. Six times 3,500 is 21,000 dollars. That is her emergency cash, and it stays in cash on purpose.

Next, she subtracted. Her balance of 30,000 dollars, minus the 21,000 she wants to keep, leaves 9,000 dollars. She planned a home repair in about a year that would cost around 4,000 dollars. So 9,000 minus 4,000 leaves 5,000 dollars with no job.

Then we looked at what her cash earns. Suppose her savings account paid 4 percent APY and inflation ran at 3 percent. On 21,000 dollars, 4 percent is 21,000 times 0.04, which is 840 dollars a year. The price rise over the same year is 21,000 times 0.03, which is 630 dollars. So her emergency cash gains about 210 dollars in buying power. Nice work, Maria.

Her checking account paying zero told a different story. On 30,000 dollars at zero percent, she earns nothing while prices climb 3 percent, or 900 dollars. That is a loss of 900 dollars in buying power in one year. She saw it plainly and she was not upset. She just moved the money.

She put the 21,000 in a high yield savings account, the 4,000 in a short term certificate of deposit timed for her repair, and she left the last 5,000 for her to decide. That last choice was hers. What matters is that every dollar now has a reason.

Where it goes wrong

I have made this mistake myself, so I speak gently. The first way it goes wrong is holding too much cash out of fear. A big balance feels safe, but over many years, it can slip behind rising prices. Fear is a poor financial adviser, though a very persuasive one.

The second way is holding cash in the wrong place. Money in a checking account that pays nothing, when a savings account nearby pays real interest, is money left on the table. Check the rate. It takes ten minutes.

The third way is forgetting the insurance limit. If you hold more than the FDIC limit at one bank, the extra is not covered. Spreading it across banks, or using different ownership categories, can keep it covered. Check the official FDIC page to confirm the rules.

The fourth way is the opposite mistake. Some people hold too little cash and then must sell other holdings at a bad time to pay a bill. Selling in a hurry can lock in a loss. A cash cushion is what lets you wait.

The fifth is confusing a money market fund with a money market account. They sound alike. They are not. One is a bank deposit, and the other is an investment fund. Know which you own.

Last, remember that rates change. What a savings account pays this year may not hold next year. Look again from time to time.

Questions to answer before you leave this page

What is each dollar of my cash meant to do, and how soon will I need it? How many months of costs would let me sleep well at night, and have I set that amount aside on purpose? What does my account pay today, and how does that compare with the yearly change in prices? Is my money at an insured bank or credit union, and is it under the limit? Have I mixed up a money market account with a money market fund? And what one small change could I make this week that would give my cash a clearer job?