Authored by Jordan Egert, CPA, CFE, CDFA™
Equitable distribution of assets and liabilities has recently seen increased focus on clients’ cash assets (savings/checking accounts, money market accounts, certain fixed income assets, certificates of deposits, money in your pocket, etc.). Cash provides us with a warm fuzzy feeling knowing we have near immediate access to its’ value. It allows us to cover day to day expenses, take advantage of market/investment opportunities, be ready for future emergencies, reduce worry about future job security, plan for future home renovations, and then some.
However, holding too much cash over the long term is not optimal. While cash’s value lies in its ability to be universally accepted as a medium of exchange, it does have some drawbacks as well which are more apparent in a volatile and down-trending market.
- Loss in purchasing power. Inflation is hot, hot, hot right now. The current Consumer Price Index recently reached 8.6% for the prior 12 months, which means on average an item which cost $100 last year now costs $108.60. Inflation itself is an increase in money supply and a devaluing of the US dollar.
- Loss of yield. Financial institutions are in the game for one reason, to make money. Many of us remember, what seems like only a short time ago, that savings accounts were paying almost 5% for simply leaving cash with them. However, current market volatility, low treasury yields and recent ‘printing of money’ (in part due to the pandemic), and other market conditions have resulted in institutions not increasing interest and/or dividend payouts proportionally on cash like instruments.
- Loss of long-term returns and tax-deferred benefits. During the 20th century, the average annual rate of return of equity positions in the stock market was 10.4% This includes years with phenomenal growth and years with dreadful declines. Although current market conditions may be frightful and short-term loss possible, one can and should take a longer-term vantage point. Maintaining a large cash position means you forego the opportunity of long-term gains and the potential benefit of compounding dividend reinvestments (DRIP).
- Retirement and employer-sponsored tax-deferred benefits Contributions to retirement plans, health savings accounts, and other employer tax-deferred/non-taxable benefits afford taxpayers a yearly, one-time opportunity to take advantage of their benefits. They provide significant long-term financial benefits including favorable tax treatment. There are no do-overs for missing the calendar year’s contributions; these contributions should generally be maximized prior to accumulating excess cash.
What can you do when cash is on the table? Work with your divorce team’s financial professional (such as a Certified Divorce Financial Analyst ®) to determine each person’s cash and cash reserve needs first, move on to discussions of remaining marital estate assets and liabilities, and then revisit excess cash for division purposes. A general rule of thumb is to ensure cash available covers 6 months of expenses and any material short-term needs, such as home down payments.
Cash may not be supreme king, but it certainly holds a place at the round table.
Jordan P. Egert, CPA, CFE, CDFA ® is a collaborative financial neutral and expert, at Councilor, Buchanan & Mitchell servicing the D.C., Virginia, and Maryland regions and beyond. His expertise lies in assisting attorneys, spouses, and other divorce related professionals make well- informed financial decisions that impact today, tomorrow, and beyond.