The Right Way To Hold More Cash

OCEAN CITY — After markets plunged in 2008 and early 2009, nearly half of respondents ages 51 to 64 surveyed in Merrill Lynch Wealth Management’s Affluent Insights Quarterly said they were most worried about accessing the cash they needed to cover monthly living expenses. As investment income declined sharply, anxiety about losing jobs or business revenue shot up, pushing concerns about security and liquidity to the fore.

While liquidity is a crucial component of any big-picture financial strategy, there is more to achieving it than simply setting aside a cash safety net. Allocating too much to cash can be almost as problematic as not keeping enough on hand, particularly with yields on savings accounts and other cashlike holdings as low as they are now. To strike the right balance, it’s prudent to resist the urge to make allocations based on reactions to market turbulence, and instead thoughtfully consider what you really need cash for and in what form. "People have three basic needs for cash. How much you should allocate to each ‘basket’ depends on your risk tolerance, the amount you need to meet your goals, and the time horizon of your expenses or purchases," explains Anil Suri, Managing Director of Investment Management and Guidance, Global Wealth Management for Merrill Lynch.

The first of these cash baskets, says Suri, is for operational cash — the money you need to meet monthly living expenses. This should be kept easily accessible, in forms such as a checking, savings or money market account. Of course, you give up yield on this cash in exchange for real-time accessibility.

The second basket is for precautionary cash, held in reserve in case of an emergency such as a job loss, a medical problem or a family crisis. .

The third basket holds cash for big-ticket discretionary items, like a new house, a child’s or grandchild’s wedding, or a private-school tuition. As the date for such a purchase approaches, it becomes more likely that you will want to keep this basket too in relatively safe near-cash investments like CDs, says Suri.

"The cash you hold serves many different purposes, from supporting your lifestyle to coping with emergencies, fulfilling a dream purchase or taking advantage of investment opportunities," says Suri. "And for many people, cash also provides a critical sense of comfort and security. That’s why it’s so important to optimize your liquidity with the appropriate strategies for each goal and purpose that cash serves in your financial life."

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)