Americans are running towards the safety of cash — but here are 3 ways they could screw that all up, pros say (2024)

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With markets down and a potential recession looming, investors are running for the safety of cold, hard cash. Indeed, they’ve sidelined the largest cash pile since April 2001, according to an October Bank of America fund managers’ survey, where 371 panelists overseeing $1.1 trillion in assets were polled. The survey found that cash as a percentage of portfolios is at a 21-year high of 6.1%, compared to a long term average of 4.8%.So we asked financial pros: What are some of the mistakes investors may be making with that cash?

Mistake 1: You’re not earning at least 2.5%-3% on your savings

You need an emergency fund even in these high-inflation times (more on that below), and those savings should be earning at least 2.5% to 3%, says certified financial planner Joe Favorito of Landmark Wealth Management.

Indeed, many savings accounts are now paying that much, which is more than they have since 2009 — see the highest paying savings accounts you may get here — so if you’re still holding that cash in your same old bank, it’s likely time to switch.

Mistake 2: You don’t have enough in cash

Yes, Americans are putting more of their funds in cash, but they don’t all have enough socked away. Of course, you might be wondering: What about inflation? Should I even have cash right now considering that? You should, pros say —and the real question should be how much.

Pros say you should have somewhere between 3-12 months of essential expenses socked away somewhere safe like a high-yield savings account — see the highest paying savings accounts you may get here. “You should always have an emergency fund,” says Favorito. “If there’s one thing Americans should have learned from the 2020 lockdowns, it’s how quickly your cash will go if you’re out of work unexpectedly,” says Favorito.

Rob Riedl, certified financial planner at Endowment Wealth Management says he would maintain cash equal to six months of expenses in a money market account at his bank as an emergency fund. His argument for sitting on cash right now is that even though cash is a non-volatile asset that’s exposed to inflation risk and losing purchasing power, so is every investment. “In comparison, stocks and bonds are currently taking declines in value in 2022 and also losing purchasing power too,” says Riedl.

The other reason you might need cash: A pending expense you plan to need funds for soon. “That might be a downpayment on a home purchase, home renovation or paying for a wedding,” says Favorito — who adds that, on the other hand, “arket timing or fears about the short term economic conditions are not prudent reasons to sit in cash.”

Mistake 3: You have too much in cash

That said, sitting in cash earning 3% when inflation is at 8% means a guaranteed loss on your money via the loss of purchasing power. “At that rate, your dollars would be worth half of what they are today in about 14 years,” says Favorito.

For those with a 6-18 month time horizon (meaning, they have 6 months to a year and a half before they need access to their cash), certified financial planner Mark Struthers of Sona Wealth Advisors recommends putting cash into something like I-Bonds or individual treasuries. “Take advantage of the inverted yield curve. A 1-year treasury yielding 4.6% beats a 10-year at 4%. Rates could rise and the current market price could drop, but if you can hold it to maturity, who cares,” says Struthers. This way, you know what your interest payments will be, what you will get at maturity and what the yield to maturity will be. “You don’t have some of the risks of bond mutual funds and you could even create a ladder with amounts coming due at 6, 12 and 18 months,” says Struthers.

And, as Kyle McBrien, certified financial planner at Betterment recently told MarketWatch Picks, while he has his short-term funds in cash, in the long-term he’s staying the course with his investments. “Stocks have historically been a strong long-term hedge against inflation so I’m keeping my long-term investments in a diversified stock portfolio,” says McBrien.