Smart strategies for managing your cash
Effective cash flow management can improve your wealth management strategy
Cash plays a crucial, albeit often overlooked, role in any financial plan — providing you with the flexibility to handle unexpected expenses. But as your wealth grows, the composition of both your portfolio and your personal balance sheet (including your allocation to cash) will shift. Hold too much in low-yielding cash equivalents, and you’ll sacrifice opportunities to grow your wealth. Hold too little, and you could face liquidity challenges that force you to sell off investments that could trigger a tax liability.
It’s not at all uncommon to see an individual’s cash levels shrink as their wealth grows. Why? Because substantial wealth opens the door to owning more sophisticated but illiquid investments — things like real estate, hedge funds, private equity and even works of art. Yet, you still need liquidity to fund a large purchase, pay a tuition bill or take advantage of an unexpected opportunity.
Key takeaways
How much of an allocation to cash is enough? There’s no hard and fast rule. Instead, it’s a matter of finding the right balance for your specific circumstances — putting as much of your money to work as possible, while setting aside enough to meet any expected liquidity needs.
Start by rethinking your cash strategy
Many people see cash as their ultimate safety net. It’s there for emergencies, smooths out life’s ups and downs, and covers big-ticket expenditures. But how much is enough? And what’s the best way to handle the extra? Robert Dyer, Managing Director, Private Wealth Advisor, puts it this way: "Cash is the lowest-return asset on your balance sheet. While it’s essential to keep some cash on hand, having too much can hold you back from achieving your financial goals." The key is to strike a balance. Keep enough cash to feel secure, but think about putting the rest to work in ways that align with your plans for the future.
Dyer suggests investors may be better served by viewing their cash needs as four separate buckets, each for a distinct purpose:
Transactional cash
Covers your day-to-day cash needs (including monthly bills, groceries, dining out, etc.). These are funds you’ll keep in your checking account for maximum safety, although a portion may be held in a slightly higher-yielding instrument such as a money market mutual fund.
Emergency fund
Money you set aside to cover a job loss, sudden illness or accident. This should be a separate tranche of funds (enough to cover 6+ months of household expenses) held in an interest-bearing money market or savings account that can be accessed easily without incurring taxes or penalties.
Reserve cash
Funds you expect to need for a major expense on the near-term horizon. Often, these funds will be held in a money market mutual fund or interest-bearing account, or you might wish to consider seeking a higher return using short-term CDs or Treasuries timed to mature when the expense occurs.
Tactical cash
Liquidity intended for future deployment on a business or investment opportunity, such as the acquisition of an artwork or commercial/ residential property. You’ll still want to preserve your principal, but there’s an opportunity to take on a little more risk in exchange for a higher return by investing in longer-duration Treasuries or high-quality, short-term corporate or municipal bonds.
Credit and lending can serve as powerful liquidity tools
While there are many types of financing available, certain types of debt may be more favorable than others and can help you wisely fund investments that will grow in value or generate income. The right kind of debt can be a strategic tool that you can use for a wide range of purposes — from providing much-needed liquidity to financing major purchases or mitigating estate taxes. In short, debt can provide valuable leverage to strengthen your personal balance sheet.
Whether you’re short of cash on hand to meet immediate needs or simply prefer to ‘keep your powder dry’ and save your available cash for another purpose, the strategic use of credit can be an invaluable liquidity management tool.
Keep in mind that your assets represent just one side of your balance sheet. Secured lines of credit, like a securities-based loan or a home equity line of credit (HELOC), afford you a simple and straightforward way to generate additional cash flow and liquidity using the liability side of your balance sheet.
For wealthier clients, it’s a way to borrow against your longer-term assets — often at highly competitive rates — to temporarily fund a major expenditure or unexpected tax liability. For instance, you might want to tap into a line of credit to facilitate the upfront cash purchase of a new home while you take your time to secure the most advantageous mortgage terms. Common lending solutions for liquidity management include:
Securities-based lines of credit: Borrowing against your investment portfolio gives you liquidity while keeping your investment strategy on track. Your advisor and a Wealth Management Lending Specialist can help you access a securities-backed Loan Management Account® (LMA® account) as a quick and easy liquidity source. These are relatively quick and easy to establish with no closing costs or fees, but since they are based on the value of your portfolio holdings, they may be impacted by market volatility.
Home equity lines of credit: Can provide a cost-effective way to fund major additions or renovations to your home or help you more effectively manage cash flow during life’s transitions. These typically take a little time to establish as they require an equity assessment, but carry no closing costs or fees, and tend to be a bit more secure since the housing market is generally less volatile than the stock market.
Custom lending: For more complex needs, custom lending allows you to use a broad range of collateral. These could include marketable securities, commercial real estate, recreational real estate, hedge fund positions, fine art collections, yachts, intellectual property and aircraft as loan collateral.
Patrick Bitter, a director for high-net-worth lending, points out, "Lending tools such as securities-based lines of credit allow you to access liquidity when you need it, for as long as you need it, without having to disrupt your investment strategy and possibly trigger capital gains taxes. For wealthy individuals and families, it’s a flexible and efficient way to manage liquidity needs and your balance sheet."
Bridge any cash flow gaps and put your excess cash to work
Life doesn’t always come with a steady cash flow. Whether it’s a larger-than-expected tax liability, a philanthropic desire, or an opportunistic business or investment venture, there are times when you may need extra liquidity. Credit lines can help bridge these gaps, letting you manage large outflows without sacrificing your financial momentum. Chelsea Botta, a Private Wealth Advisor, says, "Flexible credit solutions like securities-based lines of credit give you access to funds during uneven cash flow periods. It’s not just about having cash on hand but having the right tools to help keep your financial plan on track."
However, while it might feel ‘safe’ to leave large amounts of cash in low-yield accounts, it could cost you considerably in the long run. With cash management accounts typically yielding between 2-4% annually while the stock market averages can provide 8% annual return, you’ll need to carefully consider investing a portion of your cash reserves in a diversified portfolio if you expect to generate higher returns and grow your wealth over time. Michelle Mayer, a Managing Director and Private Wealth Advisor, explains, "When clients have excess to cash, we often talk about whether that money could be working harder for them, but always with an eye on making sure they keep the liquidity they need for daily expenses or major purchases." Even small adjustments — like moving cash into investments with higher yields — can make a big difference over time.
Cash Management Product Matrix
Product
Interest
Bank of America Advantage Relationship Banking®
Checking with the ability to earn interest
Bank of America Advantage Savings
Interest earning savings
Bank of America Flexible, Featured and Fixed-Term CDs
Various terms and interest rates available
Money Market Savings Accounts
Guaranteed interest
Money Market Mutual Fund
Slightly more risk than Money Market Savings Accounts but a higher yield
Find your right balance
Wealth planning doesn’t begin and end with your investments. It encompasses your entire personal balance sheet — including your cash flow needs and liabilities. When managed thoughtfully, a strategic liquidity management plan can unlock incredible new opportunities, reduce financial risk and help you accelerate the growth of your wealth over time. Strategic cash flow management is about stepping back to see the bigger picture. By staying invested and using credit wisely, you can create a wealth strategy that works for you both today and tomorrow.
But there’s no one-size-fits-all approach that works for everyone. Your cash management decisions will depend on a host of factors, such as the current makeup of your assets and liabilities, your anticipated short- and long-term cash flow needs, your appetite for risk and your overall wealth goals. The trick is to work closely with your advisor to make sure every dollar is pulling its weight. Ready to get started? Here are a few tips:
1. Set up an emergency fund:
Make sure you have funds that you can access quickly and reliably to cover 6–12 months of living expenses.
2. Build up a reserve fund:
Money you’ll need to cover any major intermediate expenses beyond the ordinary (including a tuition bill or a new car) over the next year or two. While these funds don’t need to be held in cash, they should be in a low-risk liquid account.
3. Explore lifestyle financing options:
If your plan involves funding the purchase of a vacation home, recreational property, yacht, airplane or artwork, find out how solutions like securities-based lines of credit, home equity lines of credit and custom lending solutions can help make those acquisitions possible without disrupting your long-term investments.
4. Learn about liquidity financing:
Bridge periodic cash flow needs, be prepared for the truly unforeseen or take advantage of an unexpected investment opportunity without liquidating portfolio holdings, which could trigger losses, capital gains or other tax consequences.
5. Review your plan regularly:
Sit down periodically to revisit your cash flow strategy with your financial advisor to ensure it still aligns with your goals and make any necessary adjustments.
Ultimately, managing cash flow isn’t just about saving — it’s about making thoughtful choices that align with your goals. Whether you’re thinking about investing, exploring credit options or optimizing your cash reserves, your financial advisor can help you develop a plan that fits your needs. Connect with your advisor today to start empowering your cash to work harder for you.
A private wealth advisor can help you get started.
Credit facilities are provided by Bank of America, N.A., Member FDIC, its subsidiaries or other bank subsidiaries of Bank of America Corporation, each an Equal Opportunity Lender. All loans and collateral are subject to credit approval and may require the filing of financing statements or other lien notices in public records. Asset-based and securities-based financing involve special risks and are not for everyone. When considering an asset-based and/or securities-based loan, consideration should be given to individual requirements, asset portfolio composition and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. For any loan with securities collateral, the securities or other assets in any collateral account may be sold to meet a collateral call as provided in the definitive loan documents, and the client is not entitled to choose which securities or other assets will be sold. A complete description of the loan terms will be found in the individual credit facility documentation and agreements. Clients should consult with their own independent tax and legal advisors.
The Loan Management Account (LMA account) is a demand line of credit provided by Bank of America, N.A., Member FDIC. Equal Opportunity Lender. The LMA account requires a brokerage account at Merrill Lynch, Pierce, Fenner & Smith Incorporated and sufficient eligible collateral to support a minimum credit facility size of $100,000. All securities are subject to credit approval, and Bank of America, N.A., may change its collateral maintenance requirements at any time. Securities-based financing involves special risks and is not for everyone. When considering a securities-based loan, consideration should be given to individual requirements, portfolio composition and risk tolerance, as well as capital gains, portfolio performance expectations and investment time horizon. The securities or other assets in any collateral account may be sold to meet a collateral call without notice to the client, the client is not entitled to an extension of time on the collateral call, and the client is not entitled to choose which securities or other assets will be sold. The client can lose more funds than deposited in such collateral account. The LMA account is uncommitted, and Bank of America, N.A., may demand full repayment at any time. A complete description of the loan terms can be found within the LMA account agreement. Clients should consult their own independent tax and legal advisors. Some restrictions may apply to purpose loans, and not all managed accounts are eligible as collateral. All applications for LMA accounts are subject to approval by Bank of America, N.A. For fixed-rate and term advances, principal payments made prior to the due date will be subject to a breakage fee.
Banking, mortgage and home equity products offered by Bank of America, N.A., and affiliated banks, Members FDIC and wholly owned subsidiaries of Bank of America Corporation. Equal Housing Lender.
Credit and collateral are subject to approval. Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice.
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