Three Considerations to Optimize Your Cash Management

Deposits are so foundational to banking that they can be easy to overlook until something goes wrong. Rather than wonder whether your personal or business liquidity strategy is optimized, or risking a negative surprise, instead carefully consider the tradeoffs among convenience, yield and risk. A thoughtful review of your cash management strategy with an advisor familiar with your short and longer-term liquidity needs can optimize the most accessible portion of your wealth and ensure you are in position to take advantage of opportunities.

1. Consider your timeline and liquidity needs

As you decide which cash management tactics best match your needs and goals, these questions can guide you to the most customized and effective choices:

• How much cash do you typically keep in your primary deposit account? How do you decide on that level? What cash and liquidity needs do you anticipate in the short and intermediate term?
• What deposit or cash management accounts do you currently use? How frequently do you move funds among them?
• What cash management tools do you currently use, from online banking to custody and investments to treasury management services? What additional services would you like to be able to access?
• How do you differentiate between short-term operational cash and more intermediate-term investible liquidity?
• What factors are most important to you about where and how you manage your liquidity? For example, safety or convenience, are you looking for a specific product or a specific interest rate or yield?

2. Choose the deposit structures that match your situation

The shortest-term deposit products include checking and savings accounts. The principal benefits to these types of deposits are flexibility and convenience. They frequently have no transaction limits and can earn interest. You may also streamline tax reporting and accounting activities by tracking transactions for individual entities in separate deposit accounts. All come with FDIC insurance and most come with online access and mobile banking apps. While high-interest online savings accounts may look attractive, make sure that the variability of the interest rate, along with transaction limits, matches your needs.

Money market deposit accounts are a good choice for money that isn’t needed to meet day-to-day spending needs or immediate obligations. Like checking and savings accounts, they earn interest, are FDIC insured and come with online and mobile banking. They often earn more interest, but limit the number of transactions you can perform.

Certificates of deposit can offer better returns, for an even larger trade-off in access to your money. You agree to leave your money in the account for a specific term, from a few months to a few years, in exchange for a guaranteed interest rate. CDs are advantageous for those who can structure these deposits to match inflows as well as anticipated future liquidity needs.

Typically, the longer the term, the higher the rate, but your banker may be able to help you to ladder, or structure, the term of various CDs to optimize both your returns and access to your funds. This is particularly valuable when there is uncertainty surrounding future interest rates.

For example, if you know you have college tuition bills coming due in three and nine months, and then a year from now you expect to purchase a new home and will need liquidity available for a down payment and closing costs, you can fund CDs in the value of those expected expenses with three, six and 12-month terms and be certain that at maturity, your principal and interest will be available.

Keep in mind that interest earned on deposits is taxed as income.

3. Evaluate the tradeoffs you are comfortable making for yield

Cash and investing priorities

After selling a business and receiving $70 million in cash proceeds, the former owner deposited the money with Northern Trust because he felt confident that the money would be secure and he wasn’t worried about the FDIC limits.

With guidance from Northern Trust banking and investment advisors, the business owner chose to hold the funds in cash for a few months while gradually transferring some into an investment account. His bankers helped him optimize the right amount of liquidity to be available at the right time to pay taxes while preserving ample liquidity for short-term cash needs. By working with his relationship team, the business owner earned a stable return on his deposits while gaining comfort with investing in the market during a tumultuous period. This strategy allowed him to maintain his capital and think through an ultimate asset allocation that he felt comfortable with.

Selecting the right CD structure for your needs

A venture capital investor had a $200 million inflow. This person preferred to keep the money out of the stock market for now. Rather than parking the money in U.S. Treasury bonds, Northern Trust offered a three-month certificate of deposit at a guaranteed rate comparable to prevailing Treasury rates when the CD was issued. At maturity, the client can roll the funds over into a new CD or withdraw the cash.

It may be appropriate to combine deposits that you have across different banks to request better rates from a single bank. Carefully evaluate whether that would be advantageous for your situation.

The value of your banking relationships

A close, ongoing relationship with a banker who invests the time to understand your finances, priorities and needs creates value for your portfolio. This relationship allows you to build an individually tailored plan to optimize day-to-day liquidity as well as yield on funds held in interest-bearing accounts and fixed-term deposits.

Knowing that an established bank has appropriate security and controls will help avoid fraud and protect you from scams, while also offering you seamless, effortless access to your funds through digital tools or in person.

Whether your needs are personal or business, Northern Trust integrates deposit and lending solutions with a broader financial plan to help you act strategically with every financial decision. Banking services — from simple to highly complex — are supported by the broad and deep knowledge of experienced banking advisors. Northern Trust has a long history of maintaining strong capital levels. Its balance sheet is made up of high-quality assets that are managed to meet anticipated obligations under all market conditions. The U.S. Treasury Department regulates Northern Trust as a Category II bank, with identical capital requirements and scrutiny to the nine global systemically important bank holding companies.