Cash Considerations

Cash Considerations

CASH FLOW MANAGEMENT

Cash Considerations

HOW CAN I MAXIMIZE MY CASH?

You may find you have excess cash as a result of a bonus, inheritance, or indecision after selling out of one investment before committing to a new one. Extra cash isn’t necessarily a bad thing, but cash that isn’t working for you could be working against you when you consider the effects of inflation. Here are a few answers to some common questions about the role of cash.

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CASH FLOW MANAGEMENT

Q. HOW MUCH CASH SHOULD I HAVE ON HAND?

A general rule of thumb suggests setting aside four to six months’ worth of living expenses in cash in the event of an emergency. Another popular approach is to have enough cash to cover deductibles for insurance - like car, health, and homeowners – should you need to file a claim. Keep in mind the amount of emergency cash should be tailored to your (and your family’s) needs based on your lifestyle. For example, cash needs would be quite different for a retired couple on fixed income, a 50 year old salesman on commission income, and a single 35 year old with a salary. Investors should consider keeping their emergency fund cash separate from cash in their portfolio in order to take advantage of new investment opportunities without having to sell existing investments and potentially creating a taxable event.

CASH FLOW MANAGEMENT

Q. WITH RATES STILL NEAR HISTORIC LOWS, IS NOW A GOOD TIME TO REFINANCE OR OPEN A LINE OF CREDIT? The low interest rate environment can make borrowing an attractive option. If you’re able to refinance to a lower rate, that is generally a prudent strategy. However, be aware of the overall costs and make sure it supports your long-term goals. For instance, if you are planning to sell your home and move in the near future, reducing your mortgage rate by 0.5% and paying closing costs may not reap the long-term savings you envisioned. Further, we’ve been in a low interest rate environment for so long that it may feel like the norm; however, rates are starting to rise and may continue until the Federal Reserve achieves their goal. One way to access cash and continue to enjoy a low interest rate is to establish a line of credit now that can be utilized as needed for planned purchases or emergencies.

CASH FLOW MANAGEMENT

Q. IF I RECEIVE EXCESS CASH FROM A BONUS, INHERITANCE, OR OTHER SOURCE, SHOULD I PAY OFF DEBT OR INVEST IT? Paying off debt or investing a windfall is a personal choice that is based on your unique situation. If you are debt averse it may give you peace of mind to reduce debt even when your finances could benefit more by investing it. In general, if you can earn more by investing the money than you would pay in interest on the debt, it is better to invest. Likewise, if the interest on your debt is more than you would earn through investing, you should consider paying the debt. Consider the following example. This client has debt with a 6% interest rate and it is tax deductible. He also has an opportunity to earn 8% on a taxable investment. In the 33% marginal tax bracket after taxes, the debt costs 4.02% while the after-tax return on investments is 5.36% so it appears that it would be better to invest

CASH FLOW MANAGEMENT

excess cash while making regular, minimum payments on the debt.

4%

5.4%

This type of question is one that can best be answered in the context of your larger financial situation and goals. That is why it is advantageous to have a financial plan and an advisor help guide your decisions.

Debt Return on investments

Source: CalcXML

Q. I’M LOOKING TO MAKE A LARGE PURCHASE SHOULD I FINANCE OR PAY CASH?

The old adage that “cash is king” may not hold true in a low interest rate environment. If you are able to invest your cash and earn 8% while borrowing for a car or home loan at a lower percentage rate, it is more advantageous to borrow for the purchase and invest the cash earning a higher interest rate. Even a small difference between your borrowing and earnings can benefit your portfolio in the long run.

CASH FLOW MANAGEMENT

Q. IF I DON’T WANT TO SPEND MY CASH, WHAT DIFFERENT WAYS CAN I BORROW?

Many consumers are familiar with mortgages, home equity loans, lines of credit, credit cards, and student or car loans. Investors often have an additional option of borrowing against their securities. With securities- based lending, you retain ownership of your investment while borrowing against the value of it, similar to a home equity line of credit. Securities-based lending can be a great source of funding for a short-term loan, like a bridge loan for example, if you find yourself needing to buy a new home prior to selling your current one. As long as the security holds it value or increases, you will have a line of credit available for use. If the security declines in value, you may have to pay down the line of credit or sell a portion of the investment to meet minimum

CASH FLOW MANAGEMENT

requirements. This is a common borrowing strategy amongst investors because it provides flexibility, a sense of control, and preserves your emergency cash.

CONSIDERATIONS FOR YOUR CASH

  Keep enough cash on-hand for your emergency fund.

  Keep up with inflation.

  Keep your borrowing options open.

CASH FLOW MANAGEMENT

Cash strategies are as unique as each individual. The approach to cash that works for you depends on your appetite for risk, short- and long-term goals and current financial obligations.

Talk to a Commerce Trust Advisor today about ways to maximize your cash.

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Past performance is no guarantee of future results, and the opinions and other information in the commentary are as of August 15, 2017. This summary is intended to provide general information only and is reflective of the opinions of Commerce Trust Company. This material is not a recommendation of any particular security, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk. Commerce does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product and specific financial situation. >Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8

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