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How Much Are You Losing To Idle Cash?

Uninvested cash may feel more readily available compared to when it's invested, but there can be better ways to manage your funds. Find out how.

Articles by Ming Jia

By Ming Jia
Trading Manager, Betterment  |  Published: October 22, 2019

Uninvested cash typically loses its purchasing power when kept out of the market-- but maintaining the wealth you have, and being able to access it, are paramount.

Low-risk, short-duration financial products can often offer a higher yield on cash as compared to traditional checking and savings accounts, while helping to keep risk minimal.

Betterment can help with its suite of products such as Betterment Everyday™ Cash Reserve, Two Way Sweep, and cash management advice.

So far, we’ve told you about the consequences of having uninvested cash in your investment portfolio. But cash is king, and so even the most savvy investors still keep money in places like checkings and savings accounts in order to have easy access to those funds, which then can be used for day-to-day expenses.

Here at Betterment, we want you to do better.

What Is “Idle Cash”?

Idle cash is money that is not invested in anything and is therefore not earning investment income. It’s money that is not actually participating in the economy– not being spent on anything and not increasing in value. Therefore, it can’t earn you anything.

Ultimately, keeping idle cash on hand is simply not as beneficial as you may think.

In fact, these funds are frequently considered wasted, as they typically cannot keep up with the effects of inflation. In the U.S., the inflation rate that the Federal Reserve targets is 2% annually— given that your idle cash likely does not increase in value, its purchasing power actually decreases as time passes.

That’s right– uninvested funds gradually lose value, since they are unable to keep up with the rate of inflation, which means that as time goes on, the $100 under your mattress can eventually only buy $98 worth of things, then $96, then $94, and so on.

And that’s just inflation– the opportunity cost of keeping cash that you otherwise could invest in the market is even worse.

Why do people keep uninvested cash?

Despite the fact that keeping idle cash can be detrimental to a successful, long term savings plan, there are still plenty of reasons for people to keep cash on hand.

Accessibility and liquidity are huge factors—investors want to be able to pay their bills from their checking accounts with the click of a button, for example—as is safety and security, and the fact that savings accounts from member banks are FDIC-insured.

The current reality is that among the checking and saving accounts out there, the return on deposited funds is very low. In fact, the FDIC announced that as of October 2019, the average yield on a savings account is 0.09% APY—in a 2% inflation environment, this is still a purchasing power losing investment. The yield on checking accounts is even worse—most of these products have very low interest rates.

How much uninvested cash can I get away with keeping?

While a small portion of uninvested cash may seem insignificant, it can be disadvantageous for at least two reasons:

  1. Preventing it from keeping up with inflation rates means your cash loses value over time, and
  2. You fail to benefit from money that can compound over time and garner even higher returns.

Typically you shouldn’t reinvest cash if it costs you more to actually invest it than what you would earn, due to, for example, broker commissions. However, at Betterment, the absence of trading commissions, as well as our ability to support fractional shares, help ensure that every last cent of your cash is being put to work for you.

If we assume an average trading cost of $7 per trade (typical of discount brokerages) and you don’t want to reduce your returns by more than 1%, then you should have, at most, $700 of cash.

Even though we recommend having no cash at all because any amount may reduce your returns, for practical reasons we believe portfolios have too much cash when they exceed $700 in cash.

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How should I manage the rest of my cash instead?

There are many schools of thought as to how cash can be managed, but the most common objectives are the following:

  1. Yield (without meaningful risk) and liquidity– simultaneously making sure that your cash does not waste away due to the effects of inflation while mitigating potential high risk.
  2. That you are able to access your cash within a reasonable amount of time.

At Betterment, we spend a lot of time thinking about how to help you make the most of all your money. In fact, we recently launched Betterment Everyday™ Cash Reserve, a high-yield cash account that’s designed to help you manage your idle cash, while keeping your potential uses for it in mind. Please note that Cash Reserve is provided by Betterment LLC, which is not a bank.

For example, our Two Way Sweep feature for Cash Reserve runs an automated daily cash analysis on your checking account, in order to determine if your account is holding too much, or too little, cash. We’ll then adjust it accordingly, all automated for your convenience.

Idle cash can also result from cash dividends which are not reinvested: at Betterment, your dividends are automatically reinvested, resulting in zero idle cash and zero cash drag from your accounts.

In addition, we provide you with a holistic picture of all your investment accounts from a cash management perspective, from idle funds in external accounts to the cash inside the funds you purchase. We highlight each portfolio’s total idle cash, along with a simple projection of how much potential returns could be lost by holding that cash amount long-term.

Betterment Everyday Cash Reserve

Betterment Everyday Cash Reserve (“Cash Reserve”) is offered by Betterment LLC. Clients of Betterment LLC may participate in Cash Reserve through their brokerage account held at Betterment Securities. Neither Betterment LLC nor any of its affiliates is a bank. Through Cash Reserve, clients’ funds are deposited into one or more banks (“Program Banks“) where the funds earn a variable interest rate and are eligible for FDIC insurance. Cash Reserve provides Betterment clients with the opportunity to earn interest on cash intended to purchase securities through Betterment LLC and Betterment Securities. Cash Reserve should not be viewed as a long-term investment option.

Funds held in your brokerage accounts are not FDIC‐insured but are protected by SIPC. Funds in transit to or from Program Banks are generally not FDIC‐insured but are protected by SIPC, except when those funds are held in a sweep account following a deposit or prior to a withdrawal, at which time funds are eligible for FDIC insurance but are not protected by SIPC. See Betterment Client Agreements for further details. Funds deposited into Cash Reserve are eligible for up to $1,000,000.00 (or $2,000,000.00 for joint accounts) of FDIC insurance once the funds reach one or more Program Banks (up to $250,000 for each insurable capacity — e.g., individual or joint — at up to four Program Banks). Even if there are more than four Program Banks, clients will not necessarily have deposits allocated in a manner that will provide FDIC insurance above $1,000,000.00 (or $2,000,000.00 for joint accounts). The FDIC calculates the insurance limits based on all accounts held in the same insurable capacity at a bank, not just cash in Cash Reserve. If clients elect to exclude one or more Program Banks from receiving deposits the amount of FDIC insurance available through Cash Reserve may be lower. Clients are responsible for monitoring their total assets at each Program Bank, including existing deposits held at Program Banks outside of Cash Reserve, to ensure FDIC insurance limits are not exceeded, which could result in some funds being uninsured. For more information on FDIC insurance please visit www.FDIC.gov. Deposits held in Program Banks are not protected by SIPC. For more information see the full terms and conditions and Betterment LLC’s Form ADV Part II.

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