Cash an Important Element for Financial Strategies

While cash isn’t often the first term investors think about when developing a well-balanced wealth plan, cash has an important role to play. That’s why you may want to consider how liquidity can strengthen your portfolio.

Indeed, liquidity management may play a fundamental role in the relationship you have with your financial professional, because it helps provide flexibility within a well-balanced financial strategy. Liquidity includes everyday living and lifestyle cash needs, strategic borrowing and generating an income during retirement.

In addition, conversations about your cash needs with your financial professional may help him or her better understand your short- and long-term goals.

Cash for major lifestyle expenses
Next to purchasing a home and paying for college for children and/or grandchildren, health care and long-term care costs in retirement may be the largest expenses most investors need to prepare for in life. Increasingly, financial professionals are recommending clients consider retirement health care insurance options, including Health Savings Accounts and prescription drug plans, and long-term care insurance. It’s important to have liquidity available in times of medical needs.

Lastly, liquidity management includes working to generate additional income during retirement. Retirees typically live 30+ years post-retirement; thus, continued investing to generate income is vital. Financial professionals work with other professionals, like tax and legal advisors, to structure retirement income portfolios for tax efficiency during the pre-retirement years and to liquidate assets in a tax-efficient way during retirement.

Operating cash, core cash and strategic cash
Operating cash is the necessary cash you need to support your lifestyle. This includes managing everyday expenses— car loans, mortgage or rent, insurance premiums, utility bills, etc. Operating cash generally resides in your checking account to satisfy these short-term needs. The expectation for this cash is immediate use, and often the account holding this cash is a non-interest bearing checking account.

Core cash includes savings and escrow cash held to pay for taxes or insurance. Some instruments include savings accounts or money market funds. Core cash may be held in certain financial instruments that produce slightly higher yields or may include short duration instruments such as short-term CDs (1-, 3-, 6-month terms) or certain treasury products (T-bills, treasury bond funds, etc.). Traditionally, the goal for this cash is principal return plus a slight rate of interest or yield with a six- to 12-month time horizon for its use. A good example of core cash is saving for a trip, a wedding or a home purchase.

Strategic cash is surplus cash and intended for longer-term investment opportunities. The time horizon for this cash is generally one year or greater. This cash can sustain moderate volatility, and you have a wide variety of choices to enhance the yield performance on it. These include short-term bond funds as well as certain mutual funds or ETFs, with a focus on controlling risk and maintaining a focus on principle preservation.

How does liquidity help?
Liquidity management helps when consulting on home mortgages and refinancing loans, small business expansion or equipment purchases, or selecting credit cards, car loans, and even considering securities-based lending. This kind of borrowing optimizes investment opportunities while offering liquidity when needed. Many high-net-worth and ultra-high net-worth clients make prudent use of credit strategies to gain short-term funding to purchase a second home, expand their business, purchase equipment or fund other wealth management goals until other financing options are secured.

An RBC Credit Access Line may be an appropriate tool when you need short-term portfolio liquidity, like covering a larger-than expected tax bill or seizing a timely real estate investment opportunity. Financial professionals also recognize the importance of helping investors borrow against eligible securities in their portfolio to diversify their portfolios or invest in additional stocks or bonds. In this case, a margin loan available through RBC Express credit may offer a way to finance the purchase of securities.

What is a good cash balance to maintain?
Inflation and taxes are known challenges for cash because both reduce the purchasing power of money over time. Working with your financial professional to develop a strategic wealth plan can assist with minimizing inflation and tax risks. You may also want to ask your financial professional to recommend tools to help you to track cash needs to support your lifestyle. This includes designating appropriate cash allocations into appropriate market instruments to generate additional yield to minimize the inflation effect.

Incorporate a cash plan into your wealth plan
Ask your financial professional how liquidity could strengthen your wealth plan to better meet your goals.

NMG Capital Group helps high net worth individuals, families, and small to mid-size institutions grow and sustain their wealth through innovative and scientific investment practices.We offer a wide array of services to businesses from retirement planning and risk management to strategic and corporate finance advisory services.

The information contained herein is based on sources believed to be reliable, but its accuracy cannot be guaranteed. Our firm does not provide tax or legal advice. All decisions regarding the tax or legal implications of your investments should be made in connection with your independent tax or legal advisor. The articles and opinions in this advertisement are for general information only and are not intended to provide specific advice or recommendations for any individual. All information as of 01/01/2021.

RBC Clearing & Custody, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC, provides clearing and execution services and/or custody services for accounts managed by your financial professional. The referenced product or service is available through that relationship.