Where to Hold Emergency Savings and Other Short-Term Cash

Holding excessive amounts of cash is an expensive position to take, thanks to the concept of opportunity cost.  From a probabilistic standpoint, for the privilege of holding excess cash an investor is paying the difference between the interest rate on cash and the expected return from other investment positions that the investor could be holding in lieu of cash. 

However, even given the relatively expensive proposition of maintaining a cash position, there are purposes for which holding cash is appropriate; for instance, an emergency savings account or savings for cash purchases within the next year or two.  For these situation-appropriate cash positions, an investor can benefit from depositing cash in a high-yield savings account that delivers around 0.90%, rather than the national average of around 0.05%.

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- Anthony Winkels is Managing Partner and Wealth Advisor at Fortis Wealth Management