Make the most of your cash: How to balance safety, growth & opportunity

Do you ever wonder if you have too much cash? Probably not. Most of us are too busy trying to manage or grow our money to ask such an odd question. And yet, when it comes to growing your wealth through investing, it’s worth examining the role of cash reserves in the context of your entire financial plan—especially now.

Today, Americans have a record-breaking amount of more than$7 trillion parked in money market funds (MMFs). Designed for stability, liquidity and modest yields, these mutual funds have long been deemed a safe haven amid economic uncertainty and high interest rates.

When rates dip, though, it’s a different story. Keeping too much cash in low-interest accounts can cost you over time. But so can hastily moving your money elsewhere. What’s an investor to do?

Optimizing your cash reserves comes down to clarifying three things: the purpose of your money, your risk tolerance and your financial opportunities. Below, we’ll consider each of these with the input of Thrivent clients, financial advisors and investment leaders.

But first, it helps to understand how we got here.

Several factors have led to the aggregation of cash holdings across America.

“Not long ago, money market funds were offering less than 1%,” says George Burgin, a Thrivent financial advisor with Catalyst Financial Advisors and Associates in Olympia, Washington. “But for the past few years, we’ve seen much higher yields, often around 5%.”

Depending on your situation, earning 5% on idle cash—with 100% liquidity, no fees and virtually zero market risk—is an attractive deal, especially compared with most traditional bank accounts.

Burgin also notes that the COVID-19 pandemic drove many clients to conserve cash (including those stimulus checks) and seek safer investments. “They didn’t want their money tied up in long-term contracts or exposed to market risks,” he says.

As the economic effects of the pandemic waned, the Federal Reserve began increasing interest rates in 2022. Many investors followed suit, reallocating significant amounts of cash from bank accounts to MMFs. When several regional banks collapsed in early 2023, MMFs saw an influx of$480 billion during March 2023 alone.

Interest rates remain relatively high, despite recent cuts.

“Money market funds are highly sensitive to interest rate changes,” says Steve Lowe, chief investments strategist at Thrivent Funds. Because MMFs invest in short-term debt instruments (think U.S. Treasury bills and certificates of deposit), they tend to reflect changes to the Fed’s interest rate benchmark in a matter of days.

So, why the recent rate cuts? Lowe explains that the Federal Reserve is bound by Congress to promote both maximum employment and stable prices through its monetary policy. This is the “dual mandate” you’ve likely heard about in the news lately.

The recent rate cuts reveal the Fed’s present concern over a weakening labor market. In theory, lowering interest rates stimulates economic growth and creates jobs; it also means lower yields on some investments, including the short-term securities that comprise MMFs.

With more rate cuts possible on the horizon, now isa good time to ask that odd question again: Are you sitting on too much cash?

The first step to answering that question is clarifying the purpose of your cash. Thrivent clients Jerome and Marva Perrin of Glastonbury, Connecticut, take a straightforward approach: Cash is for covering immediate needs and emergencies.

“When I was working, I tried to keep a few months of mortgage payments in savings,” says Jerome. “Anything extra would go in a CD.”

Now in retirement, the Perrins keep an eye on the financial markets but aren’t overly dependent on them.

“We’re not looking for home runs,” Marva says about their investment strategy. Instead, the couple draws on several income sources, including pensions, Social Security, an annuity, IRAs and beyond.

Diversifying their retirement income has afforded the Perrins more flexibility with cash. They still keep a budget and emergency savings, but now they are more inclined to spend disposable income on hobbies or travel—you know, actually enjoying retirement.

“We’re not shy about taking vacations,” Marva adds, noting that they frequently enjoy visiting their children and granddaughter.

To determine the purpose of a sum of cash, ask yourself two questions: 1) What is this money for? and 2) When will I need it? Understanding the timeline of your cash can help you decide whether and where to invest it for optimal returns.

For example, if you’re saving fora down payment on a mortgage in the next two years, you wouldn’t want to lock that money in a 5-year bond. Conversely, if you don’t plan on retiring for 20 years, you probably wouldn’t want to park your life savings in a liquid money market account. You have time, so why not invest that capital where it could grow at a faster rate for two full decades?

“Because investing is risky!” you might be thinking—which is true. That’s why the second step in optimizing your cash is knowing your risk tolerance.

With two full careers, a growing family and 42 years of marriage under their belts, the Perrins are enjoying their retirement years. But getting there wasn’t always easy.

“It took a long time to see my money growing,” recalls Marva.

The couple describes their early investment strategy as “ultra-conservative.” Like many, they were less concerned with securing competitive interest rates than saving consistently.

Marva took a “don’t look” approach with her first IRA, rarely checking the account but hoping for the best. “If I look, I may have a heart attack, or I may be extremely elated by what I see,” she jokes.

The Perrins have since become more proactive with their money. They began meeting with Thrivent Wealth Advisor Sam Chang with the Capitol Region Group in West Hartford, Connecticut, to review their financial plan and investment portfolio on a regular basis. This cadence of check-ins has helped them identify what kinds of risks they are willing to take and which they hope to avoid.

Equipped with these insights, the Perrins decided to reallocate a portion of their cash to a multi-year guarantee annuity. The fixed interest rate added stability to their portfolio while easing their concerns about market volatility in other areas.

“There are different kinds of risk,” says Chang. Of course, there is always the danger of sinking money in failed or failing enterprises. On the other hand, keeping your cash on the sidelines also comes at a cost—what Chang calls “the opportunity cost of inaction.”

Some people have always preferred keeping their money under the mattress, literally or figuratively.

“Nowadays,” says Jerome, “keeping your money in the bank is like keeping your money under the mattress.” It will stay safe, sure, but it won’t grow. Burgin calls it “lazy money,” money that “sits on the couch, eating bonbons.”

Jokes aside, the point is not to disparage cash; we all like having money handy. The point is to ask more of your cash—to align your financial plan with your goals, to clarify which opportunities best suit your shifting needs in a shifting economy.

“Getting more from your money,” as Jerome describes it, looks different for everyone. However, when rates begin to decline, some opportunities appear more attractive than others.

Over the years, the Perrins have partnered with Chang to identify solutions that continually serve their goals. They remind us that the first step toward optimizing your cash can be as simple as a conversation.

Cameron Brooks is a marketing strategist at Thrivent.

“Where else can I park my cash?” 

You have several choices for liquid, interest-bearing accounts and cash-like investments. Each option differs in yield, liquidity and stability:

Certificates of deposit (CDs):CDs offer higher yields in exchange for locking funds for a set term. Longer terms typically pay more but reduce liquidity due to early withdrawal penalties.

Short-term bond funds: These pooled investments provide diversification and steady reinvestment as bonds mature. Higher-rated bonds offer safety with lower yields, while lower-rated bonds carry more risk but higher potential returns.

Treasury bills: T-bills are short-term U.S. government obligations that mature in a year or less. They’re highly liquid, extremely safe, and interest is exempt from state and local taxes.

High-yield savings accounts: These accounts allow flexible deposits and withdrawals while offering higher yields than traditional savings. Rates adjust quickly with market changes, making them ideal for emergency funds or short-term goals.

Multi-year guarantee annuity: A multi-year guarantee annuity provides a fixed interest rate for a set period, typically three to nine years. It offers stability and predictable growth, making it a strong option for conservative investors seeking guaranteed returns.