Friday, December 10, 2010

Companies Cling to Cash - Should You?

The Wall Street Journal's Justin Lahart has a good article today pointing out that cash now accounts for 7.4% of corporate America's assets - the highest percentage since 1959. This is due mostly to the fact that companies are not finding profitable ventures to deploy their cash into, and instead are hunkering down with it given the slow economic recovery. Typically, companies with excess cash will either plow it back into the business by buying capital assets and growing their businesses, or pay out a higher dividend in order to offer a return to shareholders. In this environment however, the concern over the potential for a prolonged economic recovery has led more and more companies to pad their balance sheets with liquidity, and the most liquidity asset is cash.

Thus, if corporate America is hoarding cash, should you? Well, yes and no. The problem with hoarding cash in a low interest rate environment is that any return you earn on your cash in a savings account or a time deposit will likely be eroded by inflation. On the flip side, the liquidity that you will have as a result will give you peace of mind, particularly if the economic recovery takes longer than we would likely. I propose putting roughly 5-15% of your paycheck in an interest bearing money market account that offers checkwriting privileges. The most important thing about doing that is for you not to view it as an investment vehicle - it's not - and instead as untapped liquidity that's also earning something. After all, the liquidity is absolutely necessary, particularly in this environment. If things get worse, you'll have the extra cash available to help out and it won't appear as if you simply have "dead money" laying around.

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