What better cash management can do for you

5 min read
Tools
Jan 27, 2019

What are you doing with your next dollar?

If you’re like most people, you’re busy. You have a job that keeps you occupied during the day, and family, fun, and hobbies you want to focus on at night and on the weekends - at least when you don’t want to take a moment to kick back and watch some Netflix.

The last thing you want to think about is transferring money from your checking account to a brokerage account, picking the investments your money will go into, and planning trades that you can’t execute until the next business day anyway. It’s a hassle, and each time you do it, you’ll typically incur expenses for the trades you place.

Because it’s such a pain, it can lead to some pretty big distortions in your portfolio. I asked two business school classmates how much they had set aside in cash at the moment, and their answers were shocking - $100k and $250k. For both of them, it represented a material portion of their portfolio and they both knew that they should do something with it. But the time it would take…

Hoarding cash has consequences.

Tilting your portfolio so much towards cash can be a big drag on returns. It can turn an otherwise healthy allocation designed to grow your assets into something that’s better designed to survive the apocalypse. For anyone trying to build their wealth, a cash allocation that remains a substantial portion of your portfolio could mean the difference between retiring early and pushing things out for years.

Maybe you’re not that bad about things. Maybe you invest sporadically, when your cash level just gets to be too big to ignore. For instance, my wife will typically let cash pile up in her bank account until she has $40k or so. She’ll ask if it’s time to do something about it, and I’ll respond that it was time to do something about it months ago!

Every minute that her cash spent in a checking account was a minute where inflation was eating away the value of her hard work. In a typical year, that $40k might lose 2% or $800 of its value to inflation instead of generating 7% or $2,800 in an all-stock portfolio. Losing out on an extra $3,600 is bad enough, but that $3,600 compounds over time too, making it much more painful than it looks at first blush.

Cash management should be seamless

Farther helps to reduce this loss by making the process of investing much simpler. You have two ways to make better decisions for your future self: recurring contributions and optimized cash management.

Recurring contributions are straightforward – you pick an amount to invest consistently, month in and month out. Each month, Farther transfers and invests that set amount for you.You in turn make consistent progress towards your goals, overcome the inertia of having to remember to invest each month, and avoid market timing issues created by investing in big chunks.

But people don’t spend the exact same amounts each month. Some months you have bigger expenses than others from big vacations or buying a new TV. To better smooth out your savings, you can elect to optimize your cash management by setting a floor in your bank account and investing anything over that floor.

For instance, you could set a floor of $20,000 and if Farther saw that your balance had gotten to $27,000, we’d invest $7,000 for you. This way, you always have what you need in the bank and you’re making more out of what you don’t need in cash.

Our goal here is to help you turn behavioral psychology to your advantage. You make a one-time decision to put your cash to work, and Farther works round the clock to make sure your money is growing like you want it to. It only takes five minutes to sign up and then you can get back to all the other things keeping you busy.

Taylor Matthews

Co-Founder and CEO @ Farther

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