One of my favorite follows on Twitter is the ‘You Had One Job’ account. The expression, of course, is used to describe missteps by those who simply had one thing to do and yet were unable to do it. Some of the recent posts include the box labeled limes, yet filled with lemons. The Superman medal with a picture of Spiderman attached, or the large bag of popcorn labeled ICE in large blue letters on the outside of the bag.
There are two elements of your financial life that may fall into the ‘You Had One Job” category. Those parts are your ‘cash reserve dollars’ and your HSA (health savings account), should you have one. Cash reserves are dollars set aside for short term needs that occur from time to time. A Health Savings Account works in tandem with a high deductible health plan to cover your out of pocket expenses not covered by your insurance. When combined, the amount of funds in these two accounts can be significant. A properly funded cash reserve can easily exceed $20K and HSA accounts may top off at over $10K if a previous years balance has rolled over. At times, clients will inquire about investing those funds, in an effort to increase the paltry interest they may be earning in savings, checking or money market account. These conversations generally increase as equity returns rise and the interest savers are earning on their demand dollars remain epically low. The larger the spread between the two, the more frequent the conversations. Clients will compare the returns generated from their managed investment accounts and assume they could be earning the same on the cash or HSA accounts.
My answer to this question is always the same, those accounts have ‘one job’. Their job is to ensure the funds are available when needed. A cash reserves purpose is for emergencies and/or opportunities that may arise on a day to day basis. An HSA account’s sole purpose is to cover qualifying, out of pocket medical expenses that may occur. In both cases, it is critical that those dollars are readily liquid and accessible, free from market fluctuations and transaction costs. Investing those short term dollars exposes them to the potential of market losses and possibly investment fees or transaction costs. Those costs could easily erode any returns gained in the short run, and even the most conservative investment vehicles can experience short term losses in principle. All in, the costs and risks exceed the benefit. To put another way, it is not the job of these dollars to grow. Their one job is to be liquid and immediately accessible on demand. Leave the growth to longer term investment like to your IRA, ROTH and 401(k) accounts.
A good rule of thumb for all of your planning is the 3 year rule. If you anticipate needing the funds in the account in the next 3 years, than cash is the only suitable allocation. Consider evaluating your various accounts to assess how you envision using the funds and if your time frame matches the allocation and investment vehicles funding those accounts. Each account should one, and only one, job.
Planning Makes it possible.
William Reiner, CFP®, ChFC®