With short-term interest rates still at the highest levels in the past 15 years, managing your cash wisely is more important than ever. Essentially, good cash management involves finding a balance between having enough liquidity for your cash flow needs and generating a reasonable return on your cash. As you fine-tune your cash management strategy, watch out for these common mistakes:
Holding Too Much Cash
A common mistake many people make is holding too much cash. While having an emergency fund is essential, a good rule of thumb is to save enough just to cover 6 to 12 months of expenses. Of course, there may be exceptions if you’re anticipating large purchases, such as a new car or a big trip, but the 6 to 12-month rule is a helpful guideline for most situations.
Also, be aware of how much money you have in any one bank. The FDIC currently only insures up to $250,000 per person or $500,000 for joint accounts with a significant other. While the probability of bank failures is typically low, why take the risk, right? Being aware of these limits can help protect your hard-earned savings.
Not Taking Advantage of High Interest-Bearing Accounts
Another common error is keeping money in low interest-bearing accounts, like checking accounts, instead of moving it to higher interest options like money market accounts, money market mutual funds, or Certificate of Deposits (CDs).
Consider moving excess funds into savings accounts or money market accounts, which often offer better interest rates. These accounts are readily available, and thanks to today’s technology, there are often straightforward ways to access these funds if you need them in a hurry.
Investing Too Much in CD’s
While CDs can offer higher interest rates, there are a few things to keep in mind. Before investing in a CD, be sure to understand the contract terms and any penalties for premature withdrawal, as these can erode the gains you might have made.
CDs are not very liquid, meaning you can’t access your money easily if you need it quickly. To avoid tying up too much of your cash, consider investing your money in other ways as well.
It can be helpful to have a balance between money market accounts, money market mutual funds, and CDs to maximize your risk-free yield without leaving yourself vulnerable to a short-term liquidity need.
