In today's economic environment, managing your excess cash reserves has become a critical priority. It has been some time since the safety of checking and savings account balances became a concern. Different individuals and companies use different methods to manage their cash position. Our team implements a customizable approach and recognizes that proper cash management is a key component of wealth management.

Our approach to cash management:

Budgeting & Goal Setting: Proper budgeting and goal setting require a comprehensive cash flow analysis to determine whether you have a surplus or deficit, followed by identifying what you want to do with your money and when. Goal setting plays a key role in guiding your asset allocation strategy, with an emphasis on understanding your cash flow to determine the feasibility of your financial goals. Compound's advisors and tools simplify this process for you.

Determining your cash buffer: This is a mix of art and science. While some methodologies recommend a 3-month emergency cash reserve plus a 3-month operating cash budget, or a more conservative reserve, the optimal amount ultimately depends on your specific situation, goals, and risk tolerance.

Reaching your target asset allocation: Once your cash reserves align with your investment strategy, you can work with your advisor to implement your target asset allocation. Your advisor will proactively review and adjust your allocation as your financial situation evolves, ensuring that it remains aligned with your changing needs.

Before deciding what to do with your cash, it’s important to consider when you will need it. Depending upon how much you need and when, different cash equivalents & fixed income strategies may make sense at different times.

A Compound Advisor can help you understand your cash flows and resulting cash management needs. Our strategies can guide you in reducing excess cash & reaching your target allocation.

Managing your cash:

Very near term (3-6 months):

• These funds are reserved for recurring expenses & emergency reserve for living expenses.
• Checking/Savings accounts are protected up to FDIC insurance limits ($250k for individuals, $500k for couples in joint accounts).
• You should expect to earn a zero-to-very-low return on your cash because you prioritized maximum liquidity and low risk.

Near term (6-12 months):

• This represents your cash flow needs for the next 6-12 months.
• Within a brokerage account, an allocation to a money market mutual fund (MMMFs).
• Important items to consider: Some MMMFs might have high expense ratios, as well as varying credit quality and borrower types, and enhanced risk profiles.

Medium term (+12 months):

• If the timing of when the funds will be needed/invested is uncertain, we implement a laddered Treasury Bill strategy.
• This involves purchasing 3, 6, or 12-month T-Bills in your brokerage account for income generation and principal protection.

Long term:

• The further out your cash needs are, the more you can incorporate complex fixed income strategies within your portfolio.
• We partner with fixed income specialists that help our clients build diversified bond portfolios according to your investment objectives

A Compound Advisor can help you understand your cash flows and resulting cash management needs. Our strategies can guide you in reducing excess cash & reaching your target allocation.

FAQ:

What are the risks of not having enough cash?

If your expenses exceed your income, you’ll need to sell investments, borrow funds, or change your lifestyle. Depending upon the environment and your situation, doing one or some mix of the three can be painless or painful.

What are the risks of having too much cash?

“Cash drag” is the concept of having too much cash that earns low-to-no return and negatively impacts performance. This is especially important in today’s inflationary environment. If the total return of a portfolio is made up of its holdings, and one of those holdings returns is 0%, and the rest are positive, cash is dragging down performanc.

What are “cash equivalents”?

This includes T Bills, CD’s and other instruments that have short maturities, are very liquid, and low risk. We think cash equivalents have a very important role to play in effective cash management.

Do “cash equivalents” have the same risk as cash?

They have some of the same risks, as well as other risks including credit quality, institution. But as we are all reminded, holding cash is not without risk.