Where to keep cash?

[NW-Bound]

I use BoA, ING and Edward Jones for cash. I would like to keep about $40k in my current accounts, even at 0% interest.

I usually have more than that, but now realize that it is not a good thing.

It appears some of you don't subscribe to keeping 1, 2 even 3 years of cash on hand once you retire. I only kept an emergency fund when I was working, now I've let cash grow to 2-3 years worth of annual expenses...

I always had too much cash on hand when I was working, but that was because of poor money management. I was too busy with work, and kept telling myself I would find a place for it, while it was piling up at my BofA checking account. They love me!

But now that I have more time to arrange my finances better, it is certainly worth my time to put that money into a better place. Even at 1%, a 1-yr annual expense will get you some money worthwhile, all for a few extra mouse clicks to transfer money as you need it. All that extra interest money I let past my loose grip. Dumb!

I have a few years of expenses accumulated in his/her I-bonds (to get 2x the limit), and I count them as cash under Quicken, but I cannot bear to part with them, now that there's no way I can earn that interest elsewhere. And then, all the accrued interest over the years would get me a tax hit if I redeem.

I do this frequently but learned the hard way with Band of America because they charge a fee to transfer funds. So, the way out of this is to request the transfer through ALLY. So when I want to transfer funds from BOA to ALLY, I ask ALLY to request the funds from BOA. No fee. Also, I have noticed that funds requested by ALLY from BOA only take two days as opposed to three days. Maybe not guaranteed, but common.

I transfer funds between my BOA checking account and my Fidelity accounts all the time. I always initiate it from Fidelity, so I've never paid a fee.

Interesting! We have had the same BOA checking account for 25 years, and use it as a hub to transfer money between about 6 or 7 other accounts or brokerages.

Yet, as I always do it from the other sides, I never knew about BOA charging a fee if I do it from their side!

 

[audreyh1]

I have a few years of expenses accumulated in his/her I-bonds (to get 2x the limit), and I count them as cash under Quicken, but I cannot bear to part with them, now that there's no way I can earn that interest elsewhere. And then, all the accrued interest over the years would get me a tax hit if I redeem.

I also have good chunk in I-bonds held as part of the cash component of my portfolio AA. Wow, they are 10 years old now! I won't part with them either due to their generous rate - so I guess I'll be holding them another 20 years!

 

[NW-Bound]

Perhaps you are like some other posters who loaded up on them around the 2000 time frame. I was too dumb to see that as a good deal, because my stocks were doing so much better! Hah! I did not see the light until about 2004. The limit was still at $20K/person/yr, so I got max money in for both of us for some years.

Anyway, I wonder how much money is at Treasury Direct, locked up like ours. There you go, like another poster said in another thread, all those "gift cards" that never get redeemed for merchandise. That's what keeps inflation low, and allows more "gift cards" to be issued, while the store shelves might be, ahem, not all that well stocked.

 

[rbmrtn]

PS. Ford Interest Advantage is not a bank, and not FDIC insured! I used to keep more money there, then transferred most out during the crisis of 2008-2009. Now that Ford seems to survive well, I am going to put some money back.

When you mentioned this I checked it, as you say not FDIC and it is not a MM. It invest in Ford motor notes, so basically a bond fund. I agree F did survive well, I think I might buy their notes in my brokerage account and just hold them, interest would in the 3 - 4% range.

 

[NW-Bound]

I never bought their notes, and only have money in the 1% MM-like account. Perhaps I should buy the note itself.

Regarding Ford financial status, it has always done well, relative to GM for example. The current condition looks favorable. They just today announce hiring some 2,200 salaried workers.

PS. In 2009, after the market stabilized and I was buying back some stocks, somehow I did not buy back F, although it was clear that they did well through that fiasco. Oh well. So many good stocks, so little money.

 

[audreyh1]

Perhaps you are like some other posters who loaded up on them around the 2000 time frame. I was too dumb to see that as a good deal, because my stocks were doing so much better! Hah! I did not see the light until about 2004. The limit was still at $20K/person/yr, so I got max money in for both of us for some years.

Early 2003, and the limit was $30K/person/yr. Of course, like many now, I wish I had bought more!

 

[NW-Bound]

It could have been $30K limit when I bought too. Can't remember, but now as I just looked that them, the largest chunks were $20K.

Another wrong thing I did was not to buy in smaller chunks like $5K for better granularity. That way, I would only redeem as much as I need. Oh well, it might not matter if they are "buy, never sell" assets.

 

[MichaelB]

I've kept our reserve stash of one year budget plus expected large non-budget expenses in two muni funds at USAA for a couple of years now.

 

[enjoyinglife102]

I'm a Vanguard guy and use Ally checking/savings as my base account rather than using Prime MM. Distributions go right into Ally and at any time I can make same day purchases of any of my Vanguard funds out of Ally. Hey, 1% on 20 grand is $200 and it's FDIC insured. It's as simple as using the MM so why earn nothing?

 

[scrabbler1]

Interesting! We have had the same BOA checking account for 25 years, and use it as a hub to transfer money between about 6 or 7 other accounts or brokerages.

Yet, as I always do it from the other sides, I never knew about BOA charging a fee if I do it from their side!

I have been a BOA (or their predecessors such as Fleet and Nat West) customer for nearly 24 years and have also never been charged a fee for any electronic transfer such as paycheck direct deposit, money transfers to/from brokerage accounts, and ACH bill payments, all of which initiated from the other parties.

One way to initiate money transfers from BOA without incurring a fee is to use their online banking feature. I do this for my one remaining monthly bill.

 

[Midpack]

I'm a Vanguard guy and use Ally checking/savings as my base account rather than using Prime MM. Distributions go right into Ally and at any time I can make same day purchases of any of my Vanguard funds out of Ally. Hey, 1% on 20 grand is $200 and it's FDIC insured. It's as simple as using the MM so why earn nothing?

I've pretty much decided on Ally. I'll have very few transactions so I won't need much service, might as well go for the higher savings/MMA interest rates and no fees (as I will use it). Thanks everyone...

 

[NW-Bound]

One way to initiate money transfers from BOA without incurring a fee is to use their online banking feature. I do this for my one remaining monthly bill.

My wife has been paying all the bills from the same BoA account, and we never have to pay a fee. That includes utility bills, cable TV, internet, credit cards, insurance, car registration, etc... I do not know the details as it is her realm, but definitely no fees are incurred.

My wife said several times that without her, I would not know to pay all the bills and get into big troubles. I replied that without me, she would not know where all the money is.

We need to cross-train!

 

[Rex]

I use CIT Bank www.citbank.com for online savings. The current savings rate is 1% and everything is done online. It's easy to transfer online in and out to my checking account.

 

[Lsbcal]

I keep reading these posts and do not understand why posters:
1) hold a lot of cash beyond a few month's needs
2) do not care what their cash rate of return is

When (1) is combined with (2) it's a good way to lower your overall portfolio return. Over the decades cash has not been a great investment although there have been times (not now) when you could get a real return on it.

These charts of cash real returns (3 month Treasuries) came from an old article:

 

[Midpack]

I keep reading these posts and do not understand why posters:
1) hold a lot of cash beyond a few month's needs
2) do not care what their cash rate of return is

I don't know anyone who fits in 2). All the threads, esp in the past few years, on what to do with cash indicate otherwise IMO.


There are better explanations but I couldn't find one online quickly so as for 1), your need to hold cash is reduced if

• All or a significant part of your retirement income is provided by pensions/annuities/Soc Sec and/or other steady income (property).
• You don't want any money on the sidelines to take advantage of market opportunities.
• Your withdrawal rate is relatively low, your need to hold cash may be reduced. Those who've 'already won the game.'
• You have no/limited floor income and your retirement expenses must be met by portfolio withdrawals, if you don't care about being forced to liquidate other holdings (equities, bonds, etc.) at a bottom.
• Your tolerance for risk/volatility is high and your investing acumen is solid (you sleep well at night).
• Combinations of all or part above.

I'm sure someone will come along and provide a more coherent reply.

As with most questions $ here, there are often no universal answers. It depends...

 

[bUU]

I keep reading these posts and do not understand why posters:
1) hold a lot of cash beyond a few month's needs
2) do not care what their cash rate of return is

Regarding #1... How much is "enough" in one's emergency fund is a matter of opinion. I've seen three months, six months, nine months, twelve months, etc. I've even seen someone assert that they wanted an eighteen month cushion.

The right number is going to depend on how readily you can turn investments into cash with minimal penalty, if you needed to. The variability can be quite obvious just by looking at the words in that one sentence: How much cash you're going to need depends on your ongoing expenses and how much of that is discretionary; what constitutes a "minimal" penalty is a matter of opinion, etc. However, the biggest variable in there is how long do you think you'll be in a position of less or no income? The last time it happened to us it was nine months.

But that's not the whole story. Right now, we have eighteen months of income (yes, income, not expense), in cash, making 0.95% interest. That's way too much, of course. It is far more than our emergency fund - the rest of it is a fundamental part of our asset allocation - and to be clear, we're actually within 0.2% of our optimal allocation for "short-term".

(See "Growth" in the chart on THIS page.)

So what are we supposed to do with that cash? Just throwing it all into bonds is probably not the right thing to do. Bonds is the green portion of the chart... this is the yellow portion. So what do you suggest? I don't think there is any good answer for where to put the money associated with the short-term portion of our asset allocation.

Now to be fair, I'm just starting to learn about I Bonds, which might be the right answer. While they're bonds, there is some reason to claim that they could qualify under that "short-term" category.

 

[Midpack]

Now to be fair, I'm just starting to learn about I Bonds, which might be the right answer. While they're bonds, there is some reason to claim that they could qualify under that "short-term" category.

I've probably overlooked IBonds too long. But it's because of the $10K/yr limit on purchasing them. That means it would take 5-10 years laddering IBonds to have 1-2 years worth of income in IBonds unless I'm missing something (wouldn't be the first time). Doesn't make it a bad approach at all, just a strategy that takes many years to implement (vs CDs where you could build any ladder at least durations you want instantly). Do I wish I would have thought about it 5 years ago, maybe...though MMFs provided decent (even stellar late 70's & 80's) returns for my entire investing life until 2009 or so.

 

[Gotadimple]

Frankly, as long as you stay under the FDIC limits, who cares what the rating is?

I usually like to avoid takeover targets. When a rating is low, it means the deposits are low. To increase deposits a bank may offer higher interest. 4 star or more means a strong bank that is likely to offer consistent rates and service.

Having to set up a new account via the internet can be easy (ING - all online, fax documents or scan and attach), to complicated (send it all in with a personal check and wait for the mail and the banking system).

K.I.S.S.

-- Rita

 

[Lsbcal]

...(snip)...
(See "Growth" in the chart on THIS page.)

So what are we supposed to do with that cash? Just throwing it all into bonds is probably not the right thing to do. Bonds is the green portion of the chart... this is the yellow portion. So what do you suggest? I don't think there is any good answer for where to put the money associated with the short-term portion of our asset allocation.

Now to be fair, I'm just starting to learn about I Bonds, which might be the right answer. While they're bonds, there is some reason to claim that they could qualify under that "short-term" category.

What I posted about our cash situation is a longish term picture of handling cash. The yellow portion of the chart you mention might be a combo for ST bonds and ST CD's and even money market accounts. Or the ST bonds might be in the green part. The green "bonds" I would think is primarily referring to intermediate bonds that have a perhaps 3 to 5 year duration. Duration is then the key concept here and cash is very short duration -- near zero.

On a short term basis if one is holding a lot of cash (earning maybe 1% before inflation), there is no crystal ball to decide where to move it. At least I don't have one . I'm referring to the long term plan for stashing cash where that "bucket" is continuously filled from some higher risk/return asset.

 

[Lsbcal]

I don't know anyone who fits in 2). All the threads, esp in the past few years, on what to do with cash indicate otherwise IMO.

There are better explanations but I couldn't find one online quickly so as for 1), your need to hold cash is reduced if

• All or a significant part of your retirement income is provided by pensions/annuities/Soc Sec and/or other steady income (property).
• You don't want any money on the sidelines to take advantage of market opportunities.
• Your withdrawal rate is relatively low, your need to hold cash may be reduced. Those who've 'already won the game.'
• You have no/limited floor income and your retirement expenses must be met by portfolio withdrawals, if you don't care about being forced to liquidate other holdings (equities, bonds, etc.) at a bottom.
• Your tolerance for risk/volatility is high and your investing acumen is solid (you sleep well at night).
• Combinations of all or part above.

I'm sure someone will come along and provide a more coherent reply.

As with most questions $ here, there are often no universal answers.

I think you are right that some posters have good reasons to hold a lot of cash. I just think that some are doing themselves a disservice by doing this. They are lowering their long term portfolio return.

However, I really like to optimize things and have to remember not everyone is like that. And actually this just gives some money to the banks (or wherever that excess cash resides) to recycle to stronger investment uses. So it's probably a wash to society in the end. A comforting thought to me.

 

[Midpack]

I think you are right that some posters have good reasons to hold a lot of cash. I just think that some are doing themselves a disservice by doing this. They are lowering their long term portfolio return.

I doubt there are many members here who don't fully understand the impact on their overall return, a negative real return after inflation. Most if not all are making a conscious choice for their own reasons I'd guess...

 

[bUU]

The yellow portion of the chart you mention might be a combo for ST bonds and ST CD's and even money market accounts.

Precisely, and right now, I don't see any such combos that pay significantly higher than 0.95% to justify tying the money up for the amount of time required to get that return rate and possibly be unable to take advantage of better rates that come out in the intervening period. But I'm very interesting in learning about such combos, if there are some.

Or the ST bonds might be in the green part.

The way I understand it, one essential aspect of the yellow part is that return of the principal is guaranteed.

I'm referring to the long term plan for stashing cash where that "bucket" is continuously filled from some higher risk/return asset.

Fair enough. The way I look at it, about two-thirds of what I currently have in cash should instead be in laddered three- or six-month CDs making at least 2% more than my high-yield checking account. As soon as such CD rates are available, my plan is to start building that ladder.

 

[audreyh1]

I keep reading these posts and do not understand why posters:
1) hold a lot of cash beyond a few month's needs
2) do not care what their cash rate of return is

When (1) is combined with (2) it's a good way to lower your overall portfolio return. Over the decades cash has not been a great investment although there have been times (not now) when you could get a real return on it.

well, I have some of my short-term 1-3 years in cash, because I SPEND it. If I'm spending it anyway, I don't care about the return.

Once I pull money out of my retirement portfolio, I don't care about the long-term return.

My retirement portfolio is not optimized for long-term return either - otherwise I would be 100% equities. Instead, I balance short-term volatility potential with long-term return potential.

And guess what - 5% of my long-term retirement fund is in cash (including Ibonds) too. Why? Because when the market tanks, I use that cash to rebalance my portfolio and buy distressed assets. I don't consider it to be a "drag" when that happens!

 

[Alan]

I've probably overlooked IBonds too long. But it's because of the $10K/yr limit on purchasing them. That means it would take 5-10 years laddering IBonds to have 1-2 years worth of income in IBonds unless I'm missing something (wouldn't be the first time). Doesn't make it a bad approach at all, just a strategy that takes many years to implement (vs CDs where you could build any ladder at least durations you want instantly). Do I wish I would have thought about it 5 years ago, maybe...though MMFs provided decent (even stellar late 70's & 80's) returns for my entire investing life until 2009 or so.

Apologies for not remembering if you are married or not, but if you are then that would be $20k/year you could be putting away. I've been buying them from time to time since 2003. Looking at all the bonds we have that are at least 5 years old, the IRR ranges from 3.75% - 4.04%.

These days the money that we spend year to year from dividends goes into a bank savings account paying 0.8%, and if dividends are not enough then we'll start the draw down of IBonds.

 

[Alan]

It could have been $30K limit when I bought too. Can't remember, but now as I just looked that them, the largest chunks were $20K.

Another wrong thing I did was not to buy in smaller chunks like $5K for better granularity. That way, I would only redeem as much as I need. Oh well, it might not matter if they are "buy, never sell" assets.

You can redeem I-Bonds in small lumps, you don't have to redeem the whole bond. When I've redeemed bonds on-line, after selecting the bond I am asked to enter an amount.

IBonds.info - Redeeming an I bond

Instead of redeeming an entire I bond, it is possible to partially redeem the value of a bond. Paper I bonds can be redeemed in intervals of $25 and the remaining balance will be reissued in the remaining amount, but with the same issue date as the original bond. Electronic I bonds can be redeemed in part by using the TreasuryDirect site and going through the redemption process described below. There is a minimum redemption value of $25 and there must be at least $25 left for the remainder of the bond.