Where to keep cash?

[KMyer]

Crazy places people are hiding their cash - Aug. 12, 2011

I just read this thread. I'm glad you are having some serious discussions because I mis-read the subject line and thought the discussions were going to be going in the direction of this article.

[JOHNNIE36]

In less than a month, I'll have that problem of what to do with cash. $75K CD coming due. Interest rates on CD's suck so I'm thinking about "psst-Wellesley" income fund. Maybe Fidelity Income fund. As I recall, last time I looked, those type funds were at 4% +/_ and I'm good for that. I know those funds are not FDIC but I think they are are as safe as you can get if you are in the "market".

[bUU]

Which income fund are you referring to?

[jimnjana]

I opened an AXP account in 2012 as well as a Navy FCU account and I've had a pen fed account for years. I used Pen Fed for 1,2, and 3 year CDs. I use the AXP as liquid reserves. I just started using the Navy FCU checking account for our rental properties. They offer a much better yield on checking accounts vs USAA. I used to be primarily a USAA customer, but since they ditched me on Home Owners Insurance, I'm slowly ditching them on all the financial products that I can get a better deal elsewhere.

[JOHNNIE36]

Quote:

Originally Posted by bicker Which income fund are you referring to?

bicker, I'm thinking the Vanguard Wellesly Income fund VWINX is decent. If you have any suggestions that might be better for safety, let me know. All suggestions are appreciated.
Looking around at CD's, I can't believe they want to tie up your money for 5 years to get 2%.

[Marc]

Quote:

Originally Posted by JOHNNIE36 bicker, I'm thinking the Vanguard Wellesly Income fund VWINX is decent. If you have any suggestions that might be better for safety, let me know. All suggestions are appreciated. Looking around at CD's, I can't believe they want to tie up your money for 5 years to get 2%.

I thought your original post referenced a "Fidelity" fund? I have a related question:

When I turned 50 five years ago, I decided to change my 100% equity position by "slowly" adding bond funds. In the five years, I am now up to 20% bond split 45% Fidelty Total Bond, 40% Fidelity Bond Index, and 15% Fidelity Capital and Income (all in 403b with "K" class expenses). I have picked up the pace of transition as almost all new money goes into these bond funds and I transfer over another $30K for every $100K my portfolio increases.

All three funds are good funds with relatively low expenses. I am concerned about the "bond bubble" so I am trying to look for ways to decrease the average duration of my portfolio. I am looking at adding Fidelity Floating Rate High Income to my portfolio. My initial position will be around $50K or around 2.5% of my portfolio which isn't too large. However, when you add my FAGIX funds I get to around 7% junk. This would also amount to almost 25% of my bond allocation.

Is this too much junk? Are there other options to lower my duration? My goal is to get to 65% stocks, 30% bonds, 5% cash by time I turn 58 in three years so I do need to move a lot of money into bond funds.

thanks,

Marc

[JOHNNIE36]

Marc, my original post said "psst Wellesley" OR Fidelity Income Fund. I only said Fidelity because I was in that fund five years ago. Had a chance to get out of it and bought a brokerage CD and made some money on that transaction. I didn't know it at the time but brokerage CD's are bought and sold all the time at the brokerage houses. I got a bid on that CD and resold it and made a bunch and then transferred that to a local bank as an IRA CD. Now another CD is maturing. I'm screwed on rates and thinking about going back into the income funds, wherever they may look best.
I'm 76 years old and have to sleep good at night. No wild investments for me. It's all about safety.

[bUU]

Quote:

Originally Posted by JOHNNIE36 bicker, I'm thinking the Vanguard Wellesly Income fund VWINX is decent. If you have any suggestions that might be better for safety, let me know.

There are lots of choices for better safety. VWINX has a beta of 0.27. An FDIC-ensured CD, for example, has a beta of effectively 0.00. Volatility means risk especially for something like an emergency fund. I don't know of any financial guru who suggests that that kind of volatility is acceptable for, specifically, emergency funds. It seems like a fine fund, but is a fund the right place for that specific part of your portfolio?

Quote:

Originally Posted by JOHNNIE36 Looking around at CD's, I can't believe they want to tie up your money for 5 years to get 2%.

Me neither. My emergency fund is in a high-yield deposit account making 0.85%.

[GrayHare]

There's always the technique of overpaying taxes, and later filing an amended return. I believe the IRS still pays about 3% interest. (No, I would not do this intentionally.)

[samclem]

Quote:

Originally Posted by JOHNNIE36 Looking around at CD's, I can't believe they want to tie up your money for 5 years to get 2%.

It helps to remember that your money isn't really tied up. The very low interest rates now (that we are complaining about in this context) means that the withdrawal penalties (e.g 60 days interest for Ally CDs) are not much of a penalty at all. If a "5 year" CD yields 2% and in a year the interest rates go up by even a little, just liquidate the CD and buy a new one at the higher rate.

From a saver's perspective, this is one (modest) silver lining to the low interest rates. The withdrawal penalties for breaking a CD are relatively meaningless. Be sure to check for the length of the interest penalty--some are long.

[obgyn65]

Yes. This is one of the reasons why I like CDs a lot.

Quote:

Originally Posted by samclem It helps to remember that your money isn't really tied up. The very low interest rates now (that we are complaining about in this context) means that the withdrawal penalties (e.g 60 days interest for Ally CDs) are not much of a penalty at all. .

[JOHNNIE36]

And, if I'm not mistaken, the penalty for early withdrawal can be deducted on your income taxes.

[rbmrtn]

Check around there were several places that had a no penalty CD and others have a "raise your rate" CD where you can adjust your rate during the CDs lifetime. But their rates aren't much better than the online savings (1%), the online savings rate would go up if rates rise.

VWINX is good but it dropped -20% during 08-09. Safety and return in this environment are hard to find.

[SJ1_]

Quote:

Originally Posted by arky You can connect an Ally savings account to your local bank checking account and transfer funds in three business days. This can be setup and done all online.

that is what we do.

[audreyh1]

Thanks to all the informative responses on this thread, not only did I open one of the high-yield savings accounts to keep our near term cash for living expenses, but I also bought some IBonds in my retirement portfolio. I realized that as long as we were in a period of "financial repression" (i.e. short-term rates held below inflation), that I could use IBonds as part of the cash component of my portfolio (since they pay the inflation rate).

[smjsl]

Quote:

I could use IBonds as part of the cash component of my portfolio (since they pay the inflation rate)

Well, only if you pay 0% tax on withdrawal... more generally, with I-bonds, you lose some percentage of purchasing power depending on your tax rate upon withdrawal and inflation rate til then.

[audreyh1]

Quote:

Originally Posted by smjsl Well, only if you pay 0% tax on withdrawal... more generally, with I-bonds, you lose some percentage of purchasing power depending on your tax rate upon withdrawal and inflation rate til then.

That's way better than my other cash holdings where I pay ordinary taxes on interest income every year.

[brewer12345]

Quote:

Originally Posted by audreyh1 Thanks to all the informative responses on this thread, not only did I open one of the high-yield savings accounts to keep our near term cash for living expenses, but I also bought some IBonds in my retirement portfolio. I realized that as long as we were in a period of "financial repression" (i.e. short-term rates held below inflation), that I could use IBonds as part of the cash component of my portfolio (since they pay the inflation rate).

You are buying I bonds for the exact same reason I am. As older, higher rate CDs roll over, I am putting as much of the proceeds as I can into I bonds.

[Midpack]

Quote:

Originally Posted by audreyh1 Thanks to all the informative responses on this thread, not only did I open one of the high-yield savings accounts to keep our near term cash for living expenses, but I also bought some IBonds in my retirement portfolio. I realized that as long as we were in a period of "financial repression" (i.e. short-term rates held below inflation), that I could use IBonds as part of the cash component of my portfolio (since they pay the inflation rate).

Quote:

Originally Posted by brewer12345 You are buying I bonds for the exact same reason I am. As older, higher rate CDs roll over, I am putting as much of the proceeds as I can into I bonds.

Me too. I bought $20K in iBonds (and will most likely continue annually) and moved all my remaining VG MMF into Ally savings - thanks largely to reading ER.org threads. Now I just have to decide whether or not to contribute $12K ($6K ea) to our TIRAs while we still can (DW has earned income), seems it may be a wash.

[audreyh1]

Quote:

Originally Posted by Midpack Me too. I bought $20K in iBonds (and will most likely continue annually) and moved all my remaining VG MMF into Ally savings - thanks largely to reading ER.org threads. Now I just have to decide whether or not to contribute $12K ($6K ea) to our TIRAs while we still can (DW has earned income), seems it may be a wash.

Yep! I also anticipate buying IBonds every year until short-term cash/CD rates start matching or besting inflation again. This could take several years......