What You Need to Know
- Yield matters more for some cash stashes than others, Kitces says.
- There might be two types of cash inside the same investment account.
- There are a number of solutions available to help clients find good yields and keep FDIC protection.
Clients may wonder where and how to best park and use their cash.
Michael Kitces, head of planning strategy at Buckingham Strategic Wealth and financial planning education blogger, recently shared his ideas on the matter in a video hosted by Christine Benz, Morningstar personal finance and retirement planning director.
Kitces sees three main places for investors to place their cash, noting there are many buckets where this asset can sit, per an interview transcript.
1. ‘Frictional Cash’
This cash typically dwells in investment accounts, where clients may need relatively small amounts on hand for immediate use, perhaps for required minimum distributions or advisory assets-under-management fees, he said.
Where to put it: “There’s not a lot that we typically do with this,” Kitces said. “In most investment platforms, this goes to some kind of cash sweep or money market funds.”
This cash may not generate the best yield, “but if I have to trade into something else, then it’s kind of defeating the purpose of cash I really need available to fund my distributions. And so, I find for most investors whatever that very small amount of frictional cash is, it tends to just kind of sit there. … It’s usually protected by the core protections that are in place, of FDIC coverage for sweeps or whatever is there,” Kitces said.
2. Investment Cash
On the other hand, some cash may sit in the same account but for other purposes, such as giving investors the funds to take advantage of market opportunities or a conservative cushion against volatility, he said.
Where to put it: Advisors should look for better yields on these assets than for frictional cash, he suggested.
“I want to be able to deploy it for an investment opportunity, but I don’t need access to it to spend right away. And because of that, what we see a lot of the time for investment cash is we don’t usually literally hold it in cash,” Kitces explained.