The monthly paycheck I receive for teaching online courses at Golden Gate University is my “walking around money.” Rather than deposit it to my checking account, I cash it and put the bills in my wallet and the change in a container in my car to use for feeding parking meters. The other day, I noticed my wallet is getting fatter and fatter and my coin container is full to the brim. I am not walking around much these days.
One of the quirkier side effects of the coronavirus is a national coin shortage. With business closures and stay-at-home restrictions, temporary slowdowns in production at US mints, and fears over the pandemic’s damage to the economy, a lot of coins are staying in people’s piggy banks instead of circulating. The problem is temporary, but serious enough so the Federal Reserve created a task force to address it. Meanwhile, some businesses are requesting payment with plastic if you don’t have exact change and others are simply no longer accepting cash.
The shortage does not mean that dimes and quarters have actually disappeared. It is less about the number of coins in existence than it is about access to them. Nor is it a shortage of currency. You can still spend paper money if you’re willing to say, “Just keep the change.” And, of course, buying is no problem if you have a bank account that you can access with a debit or credit card.
The coin shortage is a reminder of the value of having accessible cash. By “cash,” I don’t mean a piggy bank full of change on your dresser or a stash of bills under your mattress. I’m referring to funds held in a bank checking or savings account that you can easily spend whenever you need to. Having an appropriate amount of available cash is an important component of a financial plan.
If you are just beginning to put money away for the future, a classic piece of advice is to start by building up an emergency fund. We tend to think of this as accumulating enough cash to cover unexpected car repairs, flooded basements, health problems, or job losses.
While that is certainly essential, the importance of a cash reserve goes beyond being prepared for emergencies. You might think of it as a “foundational” or “keystone” fund. A cash reserve helps protect your financial well-being.
When you are young and managing with a tight budget, even a relatively small cash reserve can help lay the foundation for future financial health by protecting you from debt. Your kid breaks a tooth? The car breaks down? If you cover the bill with a credit card and pay it off over several months, you stress your budget by paying interest on top of the original expense. If you pay with funds you otherwise would have added to your retirement savings, you’ve stolen from your future. Either one sets you back financially. If you can cover the cost with cash from your reserve, you stay on track with both your current spending and your investment for the future.
Having a cash reserve on a larger scale is equally important if you are retired and relying on money from your investments for living expenses. For our clients in this position, we structure their portfolios to include enough cash to cover two to four years of expenses.
Such a cash cushion allows you to maintain your standard of living without withdrawing from investments during a downturn. It protects your portfolio and allows it time to recover. In retirement, a cash reserve is not an investment, but a form of insurance for your financial well-being.