Kiplinger Personal Finances: Cash Storage Can Be Dangerous For Your Investment Portfolio | Economic news







While time is running out to use the two home improvement credits, this may be less of a problem than you might think.


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When it comes to financial security, it’s comforting to know that you have enough cash reserves to tap into when you need them.

But there’s also a downside to storing cash: it can lower your portfolio’s returns over the long term.

Of course, having a rainy day fund can help you survive financial problems like an unexpected car repair or job loss. But cash really shouldn’t play a big role in investment accounts meant to fund long-term goals like retirement.

“Cash becomes a drag on returns very quickly,” said Kristin McKenna, Managing Director of Darrow Wealth Management.

Compare short-term needs with long-term goals to find an optimal cash flow position. Personal finance professionals recommend a “bucket” approach that spreads cash over three different time periods.

A zero cash allocation is not crazy. Once you’ve funded compartment one and two and can survive Financial Armageddon, you probably have enough protection to invest aggressively with compartment three.

  • Emergency fund. You need cash savings for emergencies like an unexpected healthcare bill.

Think of your emergency compartment “as your personal safety net when life throws a curveball at you,” said Judith Ward, senior financial planner at T. Rowe Price.


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