I recently read an article in the May 2025 issue of the AAII Journal titled “The Role Cash Plays in Individual Investors’ Portfolios.” The article described a study of cash allocations in the portfolios of AAII (American Association of Individual Investors) members.
The study found that cash allocations of 5% to 10% were
most common (27%) but almost 1 in 5 (19%) allocated more than 30% of their
portfolios to cash and 16% allocated less than 5%. Definitely, a wide variance
in responses!
The study also found that
76% of the respondents placed their portfolio cash into money market funds,
followed by brokerage sweep accounts (40%) and certificates of deposit or CDs
(34%). Their top three reasons for holding cash were to fund future buying
opportunities (53%), as protection against market downturns (51%), and to fund
ongoing withdrawals such as retirement income (43%).
Reading this article got me thinking about different ways that cash- both cash assets (e.g., money market funds, CDs, and high-yield savings accounts) and actual physical cash (coins and bills)- are used in financial management. Below are five Barbservations:
Emergency Fund-
Standard advice is to accumulate three to six months of essential living
expenses in liquid savings. Unfortunately, 1 in 5 Americans have no emergency
savings and 37% can’t afford an unexpected expense over $400 according to research
by Empower. Nevertheless, it is best to save as much as you can when you can.
Life happens and any emergency savings is better than none.
Buffer Account-
Respondents to the AAII study, especially retirees living off investment
withdrawals, reported having three to five years of living expenses not covered
by guaranteed income sources (e.g., pension, Social Security) in a cash buffer
account. Not an emergency fund, this money is intended to be used for income
withdrawals to avoid tapping stocks during a market downturn.
Cash Discounts-
Shoppers and diners can be incentivized to pay for things with cash. For
example, gas stations often charge a lower price for cash purchases and some
restaurants do the same. It is also not uncommon to see people make deals with
contractors to get a discount for paying for home improvements with cash or
credit cards are simply not accepted. Example: Viking Cruises offers a 3.3% discount if
you pay for a cruise with an e-check (electronic debit to your checking
account).
Credit Card Surcharges-
It seems like more vendors these days are adding surcharges for purchases made
with credit cards. This is another incentive to pay bills with cash. Vendors
are trying to avoid the merchant fees they are charged whenever customers pay
with a credit. These fees typically range from 1.5% to 3.5% of the
transaction amount. I recently had lunch at a restaurant that was adding a 4%
surcharge for bills paid with credit cards. I whipped out cash to pay my tab.
Parking Spot- Cash assets are useful
when people have money in transition. Think required minimum distribution (RMD)
withdrawals, inheritances, settlements, life insurance proceeds, and more. Of
course, cash assets should always provide an attractive interest rate. Money
can be placed there until long-term decisions are made about what to do with
the cash.
This post provides
general personal finance or consumer decision-making information and does not
address all the variables that apply to an individual’s unique situation. It does
not endorse specific products or services and should not be construed as legal
or financial advice. If professional assistance is required, the services of a
competent professional should be sought.
No comments:
Post a Comment