Cash is King, Except When it’s Not

“Cash is King” is a phrase used in various situations.  In an investing context, it’s mainly used when the markets are greatly overpriced, and an investor is sitting on the sidelines waiting for a pull-back.  As I’ve previously written, I do not try to time the market.  I’ve seen too many investors sitting patiently in cash as the markets move away from them and inflation eats up their position.

While living in San Francisco in the late eighties and early nineties, one of my roommates dated an extremely talented singer/guitarist.  She played small gigs in coffee shops and bookstores.  She just seemed like someone who might go somewhere with her artistry.  Unfortunately, that talent did not extend to handling her finances. 

When it seemed to my roommate that she was spending money at an accelerated pace, he questioned on her it.  Her simple response was, “Of course, I have money.  I still have checks left in my checkbook.”

To the topic at hand, many people have large cash balances sitting in checking or savings accounts at banks that are losing money.  Why?  The extremely low interest rates the bank is paying you is NOT keeping pace with inflation.  Here’s a chart of historical inflation rates per year:

Source: https://www.macrotrends.net/2497/historical-inflation-rate-by-year

The other key rate to be cognizant is, of course, the Federal Funds rate.  This chart shows the historical rate going back to the 1950’s.   

Source: https://www.macrotrends.net/2015/fed-funds-rate-historical-chart

As many are aware, the Federal Reserve maintained a near zero interest post the 2008 recession.  Not until December 2015 were rates increased to .50%.  That gradual increase continues to today as evidenced by the rising slope on the right of the chart.  The Fed has indicated a goal of 3.0% by end of 2019.  As of this writing, that means only two more moves by the Fed.

With inflation rates near 2% and Fed Funds rate around 2.5% almost all typical checking and savings accounts are losing you money.   This table displays rates for balances under $25,000:

Savings Money Market Interest Checking
Bank of America 0.01% 0.03% 0.01%
BB&T 0.03% 0.04% 0.01%
Capital One 1.00% 0.85% 0.20%
Chase Bank 0.01% 0.01%
Citibank 0.04% 0.01%
HSBC 0.01% 0.01%
PNC 0.05% 0.60% 0.01%
SunTrust 0.01% 0.60% 0.01%
TD Bank 0.05% 0.20% 0.05%
U.S. Bank 0.01% 0.06% 0.02%
Wells Fargo 0.01% 0.01%

Source: https://www.fdic.gov/

Of course, everyone needs the transactional cash that these vehicles provide. How to do better with your cash?

Like most CERTIFIED FINANCIAL PLANNER™ professionals, I typically recommend between 3 to 6 months of expenses saved in a liquid vehicle depending on an individual’s situation.  Liquidity is key because in case of immediate job loss, medical emergency, or other issues, one must be able to access these monies quickly with no penalty.  Of course, there are several ways to accomplish this. 

If you are comfortable with an online, no bricks and mortar service, there are several companies touting savings rates in the 2.20% APY.  While not a customer myself, I have read positive reviews of Ally Bank.  If you go this route, I recommend companies like Consumer Reports, Nerdwallet, Yahoo Finance, or Motley Fool for comparisons and reviews of these banks. 

If you need to the ability to deposit cash and hands-on service, another option is using a bank that has a brokerage arm or vice versa.  For my clients who need additional yield and are also seek liquidity, I often use Money Purchased Funds.  This requires an actual order to be place for both buys and sells. 

From a liquidity standpoint, one day is needed to access funds.  The upside is these types of funds are yielding in the 2.35% range.   That’s a significant difference from the rates listed in the table above.  One strategy would be to limit your checking/savings balances to monthly expenses and use the purchased funds for larger balances. 

If you’d like talk about cash strategies, retirement planning or overall investing, feel free to contact me. 

Please feel free to share with others and make suggestions for future articles: peter.oneill@fiduciamwealth.com