Having excess cash is a nice problem to have, but it's still a problem. The difficulty with surplus money is it only loses value. Inflation is running, officially, at about two per cent. Unofficially, that is, in reality, it's higher. For most of us the cost of living is accelerating more quickly than that.
So if you have cash in a bank account, whether personal or for your business, you are literally losing out because it's either earning no interest or something pathetically inadequate to offset the ravages of inflation.
There are options and it's worth looking into them. If you're an individual, the first question you should ask is why you have excess cash at all. If you have debt, say a line of credit that costs you five per cent, you should pay it off because you'd effectively be earning five points by doing so.
That sounds obvious, but some people either don't realize it or figure the cash is there for an emergency. But if you have a line of credit, you can draw it down in the event you need money. This applies even more to a credit card. Remember if you have a cash advance on your Visa, you're paying interest on it from the second you take the cash, so if you have money, pay it back.
If you have no debt, ask yourself if your cash holdings are too high. It is important to have access to cash, but that doesn't mean it has to be cash. As mentioned, a line of credit is a source of cash.
Your money should not be sitting in a bank account. At the very least, get it into a guaranteed investment certificate or a T-bill. Government of Canada 90-day notes only pay about one per cent, so you're still losing money after inflation, but it's better than the 0.25 per cent the bank pays (if it pays anything).
There are also banking options. ING Direct pays 1.5 per cent on its investment savings account. Other firms have similar offerings. And most of them are guaranteed by the Canada Deposit Insurance Corp.
If you move up the ladder, you can buy fixed-income investments that pay more, like longer government bonds. But again, you're not keeping pace with inflation. Corporate bonds (or funds that invest in them) are an option, too. If you buy a fund, get the lowest management fee you can find because it will make a huge difference.
If you run a business, big or small, you're likely to always have cash sitting around, and managing it is important to your returns. It's easy to leave cash idly sitting around, but you should take the time to find places to park it that pay more than the bank. A business that has cash coming in and out every day needs to keep it as liquid -- that is accessible -- as possible, but if the balance averages only $1 million, not enormous for a company, an extra percentage point of interest adds $10,000 to profits. Amazingly, many small businesses just park money in the bank because the owners are too busy running the show.
The other alternative, especially for individuals, is equities. Dividend yields are a lot higher than interest. They should be, because they're riskier. But I believe the difference is unjustifiably high in some cases. Some blue chips are paying more than five per cent, almost three times the 10-year government bond. That strikes me as too great a difference, and I think it will close. There are two ways for that to happen: bond yields can rise or stock yields can fall. I'm betting on the latter, and investors who agree will be well rewarded if we're right.
Fabrice Taylor is an award-winning financial journalist and analyst, and author of the President's Club Investment Letter. Email him at: