Cash Management: Meeting Goals and Managing Risk

By Thomas Beirne III, CFP®  
Vice President, Senior Wealth Planning Officer and Business Development Manager
Washington Trust Wealth Management

Managing your wealth is more than just growing your portfolio. You also need to balance your cash management strategy with a solid emergency reserve and ensure that your investments align with your short-, medium-, and long-term goals.  

Understanding Time Horizons

Your time horizon is how long you plan to hold an investment before you need to access the funds. 

• Short-Term (1-2 Years)

  For money you’ll need in the near future, it’s best to prioritize safety and liquidity. Short-term investments should focus on cash or cash equivalents like money market funds, Treasury bills, or certificates of deposit (CDs). Government-backed money market funds, in particular, offer lower risk and higher tax efficiency, making them a solid option for short-term savings.

• Medium-Term (3-5 Years)

  For goals that fall within the three to five-year range, consider slightly longer-term investments like CDs that match your time frame or bonds. These investments strike a balance between generating some yield while still maintaining relative safety and predictability.

• Long-Term (6+ Years)

  For long-term goals, your investment strategy can shift to a mix of bonds and equities. In a high-interest-rate environment, you might also include some cash. However, the longer the time horizon, the more you should consider increasing your equity exposure, depending on your risk tolerance. For example, long-term goals like funding your living expenses in your 80s or 90s should prioritize growth to preserve purchasing power and outpace inflation.

Laddering Investments for Stability

You might also consider laddering as part of your fixed-income strategy. Laddering involves investing in bonds or CDs with staggered maturities, which can help mitigate interest rate risk and what the professionals call “reinvestment risk”. This approach also gives you the flexibility to reinvest at higher rates if interest rates rise. For example, you could invest in 1-year, 3-year, and 5-year bonds. As each bond matures, you can reinvest the proceeds into new bonds, keeping the ladder going. This way, you avoid having all your cash locked up in long-term investments, while still earning a return over time.

Laddering differs from match funding, where you line up investment maturities with major expenses, allowing you to manage your cash flow more effectively while taking advantage of a normal yield curve.

Emergency Reserves

What do you need for emergency reserves? If your cash is tied up in investments, consider options like a home equity line of credit, margin loan, or securities-based loan for quick access to cash in case of emergencies.

But how do you know if your emergency reserve is enough? It comes down to what helps you sleep at night. If you have a steady, reliable income from employment, you may only need to keep three to six months' worth of spending in reserve. However, if your income is unpredictable or comes in large, irregular chunks (such as for the self-employed or those who may experience income volatility based on the cycles or health of their business), you may need six to twelve months of expenses set aside.

Emergency Reserves in Retirement

If you’re already retired, managing your cash flow and liquidity becomes even more critical. You should think of your investments in "buckets" based on your time horizons. For short-term needs, funds should be invested conservatively in cash, money market funds, or Treasury bills. Meanwhile, funds for future spending should be invested for growth, with liquidity timed to when you'll need them.

Create a Comprehensive Financial Plan with Washington Trust Wealth Management

To effectively manage your cash, emergency reserves, and investments with different time horizons, it’s essential to have a comprehensive financial plan to help you define and prioritize your goals, understand your income and cash flow, and establish a liquidity timeline. Your wealth advisors at Washington Trust will work with you to ensure that your investments are well-aligned with your financial needs, both now and in the future.