Finance Understanding your need(s) for cash On the surface, it doesn’t seem as if we need to “understand” anything about cash. Most of us have a lifetime of experience with it and, unlike stocks, bonds or real estate, there aren’t a lot of complicated features and it doesn’t take a PhD in finance to figure out how it works. That said, we use cash for very different purposes. And thinking about those purposes may in fact lead us to explore different options for where we put our cash. Most of the time, you hold cash for one or more of the following reasons: Everyday spending This is money that you use for paying your utility bills, buying groceries, filling up the car, buying your morning latte and so on. Although the exact definition of what constitutes an “everyday” expense depends on your personal lifestyle, chances are that access is the most important feature here – you want your spending cash close at hand and instantly available. Earning interest is nice, but it’s probably a secondary concern. Most of the time, you’ll want this portion of your cash to sit in a chequing and/or savings account, accessible by a debit card, because you’ll be dipping into it for almost everything that you buy. “Parked” money This is the cash which you plan to use in the near future – in the next few months, or maybe a year at most – to pay for larger expenses. Some common examples include a new car to replace that 10-year-old clunker, or the new roof that you know you’ll need before the snow starts falling. For snowbirds, the money which we set aside for our annual sojourn south of the border is another example. If you’re like most Canadians, you’ll need to save up for these larger expenses over several months. During that time, you need a safe place to “park” your cash while you’re building up the pile toward your ultimate savings goal. Access isn’t so much of an issue here – if anything, it may be a good idea to remove the temptation to dip into the cash before you actually need it. Emergency fund Let’s face it: stuff happens. And when it does, getting back to normal usually costs us something. Whether it’s for a transmission that falls out of the car, a washer and dryer giving up the ghost, or a medical problem which you didn’t see coming, it’s good to know that you have a stash of cash you can dip into, rather than having to take out a loan or sell some of your retirement portfolio. Howmuch cash should you hold in your emergency fund?That depends on both your personal circumstances and your comfort level with the kinds of “what-ifs” discussed above. That said, most professional advisors recommend having a store of at least six months’ worth of everyday expenses (mortgage payments, property taxes, home and auto insurance, food and clothing allowance, etc.) within easy reach. However, some people sleep better at night knowing that they have a larger stash which they can access if they need to. Portfolio diversification This is the cash that you hold within your broader retirement portfolio. In addition to the stocks, bonds and other assets which you may hold, it’s common to hold at least some of your assets in cash – partially as a way of balancing out the ups and downs of other assets, and partially as a short-termparking place when you sell a given investment and before you reallocate the funds to another opportunity. The time period for which you’ll be holding this cash is hard to pin down. Some investors intend to only hold cash until the next opportunity arrives in some other asset. Others always hold cash, in an effort to smooth out volatility in the equity and bond markets. Either way, you’ll want to know the best place to put it, so that you can earn as much as possible on it for your retirement. CSANews | SUMMER 2017 | 27
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