Around mid-month I start to project howmuch I’ll have left in cash that can be deployed into investments. I also keeptabs on dividends coming in and how they should be reinvested. I do all of thisvia simple budgeting and have been for many years.
This planning and projection process allows my brain to explore areas where excess cash can be used in the most optimal manner. It’s important to realize that the least optimal is letting cash sit in my checking account. Why, because it becomes lazy and doesn’t work hard for me.
Set It And Almost Forget It
Almost forgetting in the subheading it means that since your cash is working for you, every now and then, (maybe monthly or quarterly) you can check your account(s) to make sure everything is working as you have designed (i.e., transfers are being made between into investment accounts, trades are taking place, and dividends are being earned and reinvested).
If your someone who doesn’t want to do all of the manual work of planning investments to buy with your cash, a great option is to set up automatic transfers. Every type of account that I have has the ability to transfer funds between each other. Banks and financial institutions need to have these types of tools to enhance the customer experience in order to stay competitive.
Some online brokers have an auto-trade feature where investments can be automatically purchased based on parameters you assign. I know TD Ameritrade has this option. I prefer to trade manually so I know exactly which price I am buying and selling.
Force Your Cash Dividends To Work
For dividend reinvestment, you can easily set this up with your brokerage. It’s simple and each time you earn dividends they will automatically be reinvested instead of sitting in cash. Again I prefer to do it myself because I may want to buy different investments each time.
Note that if you use the dividend reinvestment tool, the commission is usually free but it may limit you to buy only the same securities for which you have earned dividends. If you decide to have cash in the account to buy other investments, you may have to pay a commission.
Let’s say your investments earned adividend of 3% per year. On $20,000 that’s $600. If you don’t reinvest that$600, you are forgoing $18. It may not seem like a lot, but over time it canadd up, via compounding, if you continue to pile on more dividends forreinvestment. Also, dividends generally increase over time which makes it evenmore important for reinvestment.
The point is to have your cash workingfor you.
YouWork Hard, So Should Your Cash
I remember working in a CPA firm many years ago. The partners wanted to make sure the associates are billing the client as much as possible. In other words, the associates are always working on billable activities. This, in turn, creates more revenue and profit for the firm which gets divided up between the partners.
Think of your cash as your associates. If your cash is sitting around in a checking account earning hardly anything, it doesn’t help your pocket expand. If it is invested and can increase in value, and earn income in the form of interest or dividends, then it is working for you, always.
PerformanceReview For Your Cash
I had a bit of a balance sitting mybrokerage account recently. I had loosely convinced myself that I’ll leave thiscash for any new and exciting investment opportunities. But the more I thoughtabout it the more I convinced myself otherwise.
I thought there are opportunities rightnow. Some may argue that the stock market is at all-time highs. However, if youare invested for the long-term, there is a very good chance, from past history,that 10 years from now, the stock market will be significantly higher. In otherwords, like many of us already know, it’s about time in the market, rather thantiming the market and the best time to invest is now.
So I decided that I’m no longer going to allow this cash to sit around and become lazy. Instead, I’m going to put it my cash to work! Now, the cash in my brokerage account is practically zero since I invest immediately both the dividends earned and the cash I deposit.
The cash in my other checking accountsis enough to pay the bills and a couple hundred as a buffer.
Plan for Cash Windfalls
We all have those awesome days when a bonus payment comes in, possibly a tax refund hits your account or some other irregular reason for incoming money. Have a plan for that windfall and let most, if not all of it be for investment purposes.
If you’ve paid off high-interest debt, have enough cash in an emergency fund (three to six months), don’t let your windfall cashflow sit idly. It’s available and ready to work for you.
Remember your cash doesn’t need sick or vacation days. It’s always ready to work for you. So optimize your cash by keeping it invested. What you choose to invest in is a different story or post for another time. 🙂
JoinThe Discussion:
- What is the typicalbalance you keep in your checking account?
- Apart from yourpre-tax accounts, do you regularly invest?
______________________________________________________________________________
I use Personal Capital because (1) it’s free, (2) it tracks all of my accounts and overall net worth, (3) my account balances automatically update, (4) it shows how my investments are diversified and allocated in various sectors, and (5) can use built-in tools like “Investment Checkup” to get….wait for it…free personalized advice!
Check out my simple, yet detailedPersonal Capital Review here.
