Am i crazy for keeping 3 months operating capital in a HYSA?

Is It Crazy to Keep Three Months of Operating Capital in a High-Yield Savings Account?

Have you ever questioned your financial strategies when managing your business funds? Recently, I found myself pondering whether holding three months’ worth of operating capital in a high-yield savings account (HYSA) was the most prudent decision. With substantial monthly expenses, this approach provides me with a sense of reassurance, allowing me to focus on running my business without constantly worrying about cash flow.

However, I have to admit that I’m starting to feel a bit conflicted. After experiencing six consecutive months of profitability—following a challenging three-year period where I barely broke even—there’s an undeniable temptation to invest my cash into the thriving stock market instead of letting it sit idle.

A Quick Clarification:
While I often refer to my account as a HYSA, it’s worth noting that it’s not a standard high-yield savings account. Instead, I’m utilizing an ultra-short Treasury bill ETF that I hold until maturity (SGOV). This option functions similarly to a traditional HYSA and carries minimal risks while offering a competitive interest rate of 5%.

As I weigh the benefits and drawbacks of maintaining a sizable cash reserve, I can’t help but consider how best to allocate my resources. Am I playing it safe, or am I missing out on potential investment opportunities? I’d love to hear thoughts from fellow entrepreneurs on how they effectively manage their operating capital and navigate these financial decisions.

1 Comment

  1. bdadmin

    Reply

    It’s great to hear that you’ve experienced a positive turnaround in your business after a challenging period. Your question regarding keeping three months of operating capital in a High-Yield Savings Account (HYSA) or a similar ultrashort Treasury bill ETF like SGOV is quite pertinent, especially in today’s economic climate. Here are a few insights and practical considerations to help you navigate this decision-making process.

    Evaluating Your Cash Reserve Strategy

    1. Mental Security vs. Opportunity Cost: It’s essential to balance mental security with the opportunity cost of keeping cash on hand. While having three months of operating expenses as a liquid reserve can provide peace of mind, especially during uncertain times, consider whether this amount is necessary now that you’re consistently profitable. It might be worth examining your business’s cash flow patterns—are there seasonal fluctuations, or do you typically have a steady stream of revenue?

    2. Understanding SGOV and Alternatives: Holding SGOV or a similar ETF can indeed provide relatively stable returns while maintaining liquidity. The average yield of 5% can be an attractive alternative to standard HYSA returns. However, ensure you’re comfortable with the potential risks involved while also being aware of the possibility that interest rates may fluctuate. Since SGOV is backed by Treasury bills, it’s less risky than equities, but it does behave differently than cash in a HYSA, especially during different market stages.

    3. Emergency Fund Flexibility: Assess if three months is the right duration for your operating expenses. Depending on your business type, a shorter reserve could suffice if you can access additional capital quickly when needed. Alternately, you might consider diversifying your reserves into various instruments—perhaps a mix of cash, short-term bonds, or a portion in a HYSA—which can help optimize returns while providing the security you desire.

    Investment Considerations

    1. Market Timing and Investment Diversification: Since you’ve mentioned the stock market boom, it might be tempting to invest more of your cash into equities to take advantage of potential growth. If you choose this route, consider dollar-cost averaging in—this means gradually investing your cash in the market rather than committing a lump sum all at once. This strategy can reduce the impact of volatility and minimize the risk of investing at an unfavorable time.

    2. Asset Allocation Strategy: It could be beneficial to set a target for asset allocation. Determine what percentage of your portfolio you wish to maintain in liquid, risk-free assets versus growth-oriented equities or other investment vehicles. This could streamline future decisions and provide a clearer path to achieving both liquidity for operating expenses and growth for your capital.

    Financial Planning and Future Growth

    1. Reassessing Goals and Strategies: As your business continues to perform and evolve, don’t hesitate to regularly reassess your financial goals. Creating a financial roadmap can help ensure you are not only maintaining operational effectiveness but are also set up for growth and expansion as opportunities arise.

    2. Consider Professional Guidance: If you find the investment landscape becoming overwhelming or complex, consulting a financial advisor can provide personalized insights and strategies tailored to your unique situation. They can help create a more comprehensive plan that includes risk tolerance and growth objectives.

    In summary, while keeping three months of operating capital in an HYSA or a similar low-risk investment like SGOV provides mental security, it’s wise to evaluate if that structure still aligns with your current business dynamics. Striking a balance between liquidity and growth-oriented investments can enhance the overall health of your financial position while reducing any regrets linked to opportunity costs. Stay informed, and best of luck on your prosperous journey!

Leave a Comment