Cash In Bank...Or Not.

[Meadbh]

Life is too short.......

Audrey, you are one of the people I regard as most knowledgeable about finance on this board. If anyone understands these concepts, you are at the top of the list. Just ignore the ill-informed comment (perhaps based on stereotypical assumptions about women).

 

[bad_LNIP]

If anyone understands these concepts, you are at the top of the list.

I'm pretty sure Audrey has no idea about any of the stuff I was talking about other than the generic "Options are scary...options are risky" talk that I have seen, if that, which is fine. I also know next to nothing about nuclear propulsion, but I don't go bashing the concept.

The comment has nothing to do with her gender, and everything to do with her comment about options and hedging:

Yeah, right, a lot of folks here are going to jump in with puts and covered calls to hedge their investments. Give me a break!

I challenge her to explain why hedging is bad or what is so difficult about 2 of the most simplistic strategies, and now life is too short and she needs a break.

 

[Sunset]

The issue I see with selling covered calls and/or puts is that your safety net fails you should the market drop 10% and then keep dropping.

Either way you are down a lot of cash, just when you might need it if the market then stays down or flat for the next couple of years.

I have no issue with using options as part of my investment mix, but I don't consider that part my emergency cash part.

 

[HawkHorn01]

Hmmm. All that concern about earning 1-1.5 % on that cash you have laying around that bothers you all. If you have cash, like I do often, available to take care of many monthly costs or needs, I offer cash rather than a credit card and it saves the business most times anywhere from 3-5% off the top on transaction costs. Take in consideration other financial business costs which can be another % or two and when I offer to pay in cash for a 3-4% discount, many times it is very well accepted. Soooo, see, my cash earns/saves me easily 3-4% and I don't have the worry, time consumption and other headaches some of you others are stressed out all about.


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[jlenhart80]

Hmmm. All that concern about earning 1-1.5 % on that cash you have laying around that bothers you all. If you have cash, like I do often, available to take care of many monthly costs or needs, I offer cash rather than a credit card and it saves the business most times anywhere from 3-5% off the top on transaction costs. Take in consideration other financial business costs which can be another % or two and when I offer to pay in cash for a 3-4% discount, many times it is very well accepted. Soooo, see, my cash earns/saves me easily 3-4% and I don't have the worry, time consumption and other headaches some of you others are stressed out all about.


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Interesting idea. What kinds of businesses and transactions are you talking about? Big ticket? Daily items? I cannot imagine the clerk at a grocery store has the authority to give you a discount. None-the-less I'm intrigued.

 

[MRG]

The issue I see with selling covered calls and/or puts is that your safety net fails you should the market drop 10% and then keep dropping.

Either way you are down a lot of cash, just when you might need it if the market then stays down or flat for the next couple of years.

I have no issue with using options as part of my investment mix, but I don't consider that part my emergency cash part.

+100

Exactly why it's a bad strategy for cash you might want next week/month/year(s).
When all you have is a hammer everything looks like a nail.
Played that game, it works till it doesn't.

 

[MichaelB]

If anyone understands these concepts, you are at the top of the list.

I'm pretty sure Audrey has no idea about any of the stuff I was talking about other than the generic "Options are scary...options are risky" talk that I have seen, if that, which is fine. I also know next to nothing about nuclear propulsion, but I don't go bashing the concept.

The comment has nothing to do with her gender, and everything to do with her comment about options and hedging:

Yeah, right, a lot of folks here are going to jump in with puts and covered calls to hedge their investments. Give me a break!

I challenge her to explain why hedging is bad or what is so difficult about 2 of the most simplistic strategies, and now life is too short and she needs a break.

I think it's time for everyone to take a step back. Personalizing like this rarely leads to a positive discussion. We're a friendly bunch here and are passionate about early retirement. Let's leave the dueling and challenges to others.

 

[JoeWras]

Some of them are just beyond what I could possibly do. My credit union is in there, but you need to make 30 transactions per month. That means I'd have to use the card 10 times each time I go out of the house, hehe! And some of them require a certain dollar amount, and I just don't spend that much money, especially since DW holds the grocery budget, and uses her card on that.

Ah one of those. Maybe the CU as mine. This concept of making transactions and bowing down to their debit card god actually has me getting away from that particular CU. Same CU called me up the other day distressed that I'm liquidating my lousy CD and moving it somewhere else. They implored me to talk to their financial advisers. Blah.

Last month PNC was having a deal on new accounts with a bit more than 1% in money market for 1 year. They may still have it. We have some there for quick quick cash and then will probably move on next year.

 

[pb4uski]

......explain why hedging is bad or what is so difficult about 2 of the most simplistic strategies, and now life is too short and she needs a break.

I don't think hedging is bad or necessarily difficult, but the few times I have explored hedging my portfolios I have found it to be quite expensive and I decided that I was willing to retain the risk rather than pay for cost of the hedge.

Beyond that though, your comments suggesting that understanding hedging might be beyond some members' understanding was just plain rude and unnecessary.

 

[bad_LNIP]

The issue I see with selling covered calls and/or puts is that your safety net fails you should the market drop 10% and then keep dropping.

And what happens when you throw a put on it and make it a collar? Oh, wait I know:

You'll be down about 3-5% max. Max draw down is about 8% in the worst of conditions, and yes I'm talking October 87 bad. Go to page 4.

CBOE

Average annual returns of 7% I think is worth the risk of a max potential DD of 8%.

 

[MichaelB]

Why don't you give it a rest and take that discussion elsewhere. The thread topic is about options for emergency cash. Insisting on this theme of collars and options is hijacking the thread. Let's get back on topic.

 

[HawkHorn01]

Everything sounds and looks real rosey at this time. I think the only thing that can through a wrench into your finely tuned ( I use this word because your into music) machine is your health going forward. If you can predict that and the weather at the same time, you have no worries I would say no might do a "worst" case experiment on a health problem situation that may be somewhat real from information of pass family history data and see h


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[MRG]

Interesting idea. What kinds of businesses and transactions are you talking about? Big ticket? Daily items? I cannot imagine the clerk at a grocery store has the authority to give you a discount. None-the-less I'm intrigued.

The one we use, is our dentist gives a 10% discount for cash. I too would love more information on other places this works at.

 

[HawkHorn01]

I have used cash/check to get 15%-25% discounts on many big tickets expenses. Saved that much on dentist, eye doctor bills, lawn services, exterminator services, house when I got it painted inside and out, new roof cost and a "minor" surgery bill which I saved almost 50% on which saved over $750.00 dollars on that alone. This technique AND to read a book entitled " How to Negotiate Anything??"

Tells you about the things you can negotiate from of course cars, appliances, furniture and hundreds of other items including many services. It also tells how many of these can be paid by cash or checks that include substantial discounts.


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[jlenhart80]

I have used cash/check to get 15%-25% discounts on many big tickets expenses. Saved that much on dentist, eye doctor bills, lawn services, exterminator services, house when I got it painted inside and out, new roof cost and a "minor" surgery bill which I saved almost 50% on which saved over $750.00 dollars on that alone. This technique AND to read a book entitled " How to Negotiate Anything??"

Tells you about the things you can negotiate from of course cars, appliances, furniture and hundreds of other items including many services. It also tells how many of these can be paid by cash or checks that include substantial discounts.


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Thanks. Appreciate the explanation. These kinds of things make sense, but I haven't executed the technique personally. As you have pointed out, this demonstrates the value of having cash on hand. I'll look into the book.

 

[Fermion]

Options are great when used wisely.

Knowing we were going to retire in 2015, in 2014 I sold some LEAP 2016 calls against a basket of stocks I had significant gains. I used the proceeds from the sale to pay off our 3.625% home loan (the balance had gotten smallish and we were right at standard deduction territory).

In 2016 when the calls expire our tax bracket will be 10% or lower. The capital gains from the stock plus the call premium will be our ACA qualifying income for 2016 so we don't have to go on Medicaid.

From 2014 to 2016 I have also been collecting dividends on these stocks, around 2 to 3% for each. The strikes were far enough out that I am not too concerned about early exercise but that is always a risk.

 

[jlenhart80]

There has been a lot of discussion on this thread over the past two days. Appreciate all of the thoughts. Here is where I am on this topic:

1.I immediately want to get the money into a “high yield” interest savings account or money market account with no maintenance fees. Best I have seen is something like 1.05% from GE capital. I'll also move some money I have idle in an investment account there so it is put to work while I do some DCA investment of those funds.
2.Long term, I'm looking for maximum flexibility with some amount of cash. Probably a couple months worth so that will stay in cash for sure.
3.Leveraging a HELOC is a nice idea, but not an option for me.


For the remainder if what is currently cash I will investigate the following options while the money is in the high yield savings account:
a.DCA into current investment portfolio. Seems like a straightforward option.
b.Better utilize negotiations for cash payment. Like the idea for big ticket items.
c.Learn a bit about puts, options and covered calls. Currently know nothing about this topic, but knowledge is power.
d.Long term CD w/ low withdrawal penalties.

This discussion is all very helpful and like many things, there is never one “right answer”. Further comments welcome.

 

[JoeWras]

1.I immediately want to get the money into a “high yield” interest savings account or money market account with no maintenance fees. Best I have seen is something like 1.05% from GE capital. I'll also move some money I have idle in an investment account there so it is put to work while I do some DCA investment of those funds.

Exactly. That's what I'm doing.

I'm no special PNC fan, but I like the fact they have a physical presence everywhere. Their introductory rate of a bit over 1% is nice for a branch bank. We'll go somewhere else after the year is up.

I also have some in Ally, but that's on-line.

 

[jlenhart80]

Exactly. That's what I'm doing.



I'm no special PNC fan, but I like the fact they have a physical presence everywhere. Their introductory rate of a bit over 1% is nice for a branch bank. We'll go somewhere else after the year is up.



I also have some in Ally, but that's on-line.

I have a couple PNC accounts but I don't see a 1.0% offer anywhere. Maybe it's over? I'll go see them Monday, but if you see one on the web, can you post here? Thanks.


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[JoeWras]

I have a couple PNC accounts but I don't see a 1.0% offer anywhere. Maybe it's over? I'll go see them Monday, but if you see one on the web, can you post here? Thanks.


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It was an introductory offer for a new customer account. We opened in December. My guess is the offer is over.

Sorry about that. The point is to check around and you may find one of these. The problem of course is that it is for a limited time.

 

[steelyman]

c.Learn a bit about puts, options and covered calls. Currently know nothing about this topic, but knowledge is power.

I think that's a good point and helps understand what those screaming talking heads are talking about.

There is a good book, Create Your Own Hedge Fund by Mark Wolfinger, that explains the basics and terms (e.g., "rolling forward").

There's another book, Options As A Strategic Investment, by Lawrence McMillan, that seems more like a "bible" to me, suited for people really serious about Finance. I'm not in that league.

I did covered calls and cash-covered puts for a little while, but it was more work than I wanted. I still sell puts when I want to buy a stock at a lower price but that's not frequent. I wouldn't include them as part of a cash-management plan.

 

[Jerry1]

Personally, I like a good amount of cash on hand. However, what I started doing when I got up to $100K was to take some of it and bought some dividend stocks. I did this when I first hit $100K and put $50K in a Schwab account and I'm about to hit $100K again and about to do it again. The stocks I bought were 5 of the highest dividend yielding stocks from the S&P Dividend Aristocrats. These are companies that have increased their dividends every year for 25 consecutive years. I bought the stocks because buying the ETF diluted the yield. I expect that I will get about 3% on these funds. It's not as liquid as I would like, but I sacrificed liquidity for some return. And of course, it is liquid, it's just the risk of the stock price being low when you need to sell that is the risk.

I've been in this for about a year and even though the stock prices have been a little volatile, the dividend return on my original $50K has been as expected. I'm actually looking forward to the next $50K drop into that account (even though my cash will drop and need to be built up again).

 

[scrabbler1]

I understand the desire to keep the emergency fund all liquid, but once one has accumulated enough other assets I think that it no longer necessary. An "emergency" that requires six months or more of expenses to settle is unlikely to need that sum on short notice all at once. So I keep mine in tiers. A couple months expenses immediately available in a bank account, the rest spread like my portfolio allocation. That part of the emergency fund has not been needed and as a result has grown to multiples of what it would be had it stayed in immediately accessible bank accounts. Even in a 60% or more down market I'm still ahead. Plus I agree with others that a HELOC (while not a guaranteed emergency fund and could be frozen, etc) can be used to smooth out emergency cash needs, so this make the tiered approach even more useful.

I, too, have a tiered approach to my overall portfolio. However, I despise the idea of keeping a large blob of money in something which generates next to nothing in interest.

My first tier consists of a small amount of money in my local bank's checking account. This amount is simply a buffer of about $750 above the minimum balance required to avoid monthly account fees. I often need to tap into that buffer, or surplus, to meet my monthly expenses, as this highly liquid cash can cover small, unforeseen expenses via check, debit card, or ATM cash withdrawal, for example. My ER budget has some "lumpy" expenses so the buffer smoothes them out rather well.

My second tier is about $40k in an intermediate-term muni bond fund. This bond fund generates about 2%-2.5% in mostly tax-free interest on an annual basis (or about $100 per month). There is some risk to the principal, of course, but it is generating interest to offset any fairly small loss in principal. But I rarely have to access this fund, only if the first tier can't cover larger, unforeseen expenses (on average less than once a year). I have checkwriting privileges in this bond fund which makes the money more accessible, a plus.

If the OP doesn't like the risk associated with an intermediate-term muni bond fund, then he can invest in a shorter-term muni bond fund with a lower rate of return but less volatility in its principal.

 

[Sunset]

I have used cash/check to get 15%-25% discounts on many big tickets expenses. Saved that much on dentist, eye doctor bills, lawn services, exterminator services, house when I got it painted inside and out, new roof cost and a "minor" surgery bill which I saved almost 50% on which saved over $750.00 dollars on that alone. This technique AND to read a book entitled " How to Negotiate Anything??"

Tells you about the things you can negotiate from of course cars, appliances, furniture and hundreds of other items including many services. It also tells how many of these can be paid by cash or checks that include substantial discounts.

It sounds like most of your discounts have been from the ability to negotiate, vs saving the person 3% CC fee, or for some, allowing them to not claim the income so not pay tax on it.

I don't think the discounts add up all that much, as lets say you have 100K in cash for 2 yrs of spending safety. Since you can only get a discount on some of the spending (not groceries, phone, cable, etc) the % as counted from your total cash would be pretty small. Even smaller considering some of those discounts could happen even if paying by CC as it was your negotiation skills that made up the bulk/all the discount.

I'm not saying its not good, but I'd take a 3% CD any day vs talking Chili's waitress down on the cost of a meal.

 

[mistershankly]

My second tier is about $40k in an intermediate-term muni bond fund. This bond fund generates about 2%-2.5% in mostly tax-free interest on an annual basis (or about $100 per month). There is some risk to the principal, of course, but it is generating interest to offset any fairly small loss in principal. But I rarely have to access this fund, only if the first tier can't cover larger, unforeseen expenses (on average less than once a year). I have checkwriting privileges in this bond fund which makes the money more accessible, a plus.

I've been considering this fund/option as a supplement to my HELOC emergency fund... i.e. use this fund to repay the HELOC (depending on interest rates, etc).

How did you determine how much you wanted in this relatively low risk tier? Is it your entire emergency fund or a percentage of it? Do you syphon off any portion as it grows (e.g. $1k or more) to a fund offering better returns or has that tier grown to that point and continues to grow without touching it?