Cash In Bank...Or Not.

[jlenhart80]

Hi all. I have been struggling with the question of having too much cash in a bank savings/checking account. Currently I have a little more than $95k in a savings account and the interest rate is almost nothing. It is nice knowing that I have some cash on hand in case of emergency, but the cash isn't even keeping up with inflation and there must be some other options out there. I do have other money invested in taxable, tax deferred, and tax free accounts (see previous posts).

I have read about cd ladders and perhaps that is an option, but what other low risk, easily accessible in case of emergency, investment options are there?

Thanks!

 

[Meadbh]

My solution is keep a much smaller amount of cash and have a HELOC as an emergency fund.

 

[braumeister]

An online savings account gives me 0.95% and that's where I keep my emergency fund.

 

[audreyh1]

Hi all. I have been struggling with the question of having too much cash in a bank savings/checking account. Currently I have a little more than $95k in a savings account and the interest rate is almost nothing. It is nice knowing that I have some cash on hand in case of emergency, but the cash isn't even keeping up with inflation and there must be some other options out there. I do have other money invested in taxable, tax deferred, and tax free accounts (see previous posts).

I have read about cd ladders and perhaps that is an option, but what other low risk, easily accessible in case of emergency, investment options are there?

Thanks!

Transfer most of it to a high yield savings account. You may be able to get 1%, but still have it available for immediate withdrawal. FDIC insured, just like your current account.

1yr CD rates don't get much better than that.

MMA and Savings Rates by Bankrate.com

 

[zesty]

I Bonds are an option, once you get past the year lockup. I have been moving $10k into those from my savings account each year for the past few years.

 

[growing_older]

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.

 

[bad_LNIP]

OP how old are you? Total your other assets do you have and what % of your overall is the 95k?

In general, I think keeping that much in cash is bonkers and absurdly excessive. I haven't once and don't know anyone that has had an emergency that required 95k, like ever in my life.

You are losing 2-3% per year or about $200 per MONTH keeping it in cash. Cash is very expensive and very risky.

 

[Fermion]

Where might one get 2 to 3% per year with no risk and high liquidity?

 

[aja8888]

Where might one get 2 to 3% per year with no risk and high liquidity?

Sign me up too!

 

[bad_LNIP]

Where might one get 2 to 3% per year with no risk and high liquidity?

There is no such thing as a no risk investment. Anything you do has risk, including sitting in cash, which is inflation and can't really be hedged out or reduced as a risk. It is there eating away at your cash every day.

The closest thing you can get to are ETF's as far as minimal risks and high liquidity. Possibly selling cash secured puts or covered calls to reduce risk and generate income, but if plan A is just taking it on the chin from inflation, you really need a plan B.

 

[audreyh1]

Where might one get 2 to 3% per year with no risk and high liquidity?

There is no such thing as a no risk investment. Anything you do has risk, including sitting in cash, which is inflation and can't really be hedged out or reduced as a risk. It is there eating away at your cash every day.

The closest thing you can get to are ETF's as far as minimal risks and high liquidity. Possibly selling cash secured puts or covered calls to reduce risk and generate income, but if plan A is just taking it on the chin from inflation, you really need a plan B.

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!

There is absolutely nothing wrong with keeping a % of your assets in cash. If someone is worth several million $ and they have a couple hundred K in cash earning 1%, I don't see how anybody can criticize them.

As long as someone has a high enough % in diversified equities, their investments will keep up with inflation. They don't need to worry about their cash allocation keeping up with inflation.

 

[jlenhart80]

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.

My solution is keep a much smaller amount of cash and have a HELOC as an emergency fund.

Thanks for the comments. Good point on the distribution spread within other investments. I guess I had it in my mind that it should be in something "safe", but your point is a good one regarding overall growth (and decline) over time.

Additionally a HELOC is not valid for my situation. I do not have a home loan. I can see where that would provide value is your case.

 

[bad_LNIP]

Audrey I fail to see the complexity with puts or covered calls. It may be beyond your understanding but it isn't that hard. Not sure when hedging became a bad thing esp for so called risk averse people. If I really wanted to get froggy with it, I would have said throw a collar on it.

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[jlenhart80]

OP how old are you? Total your other assets do you have and what % of your overall is the 95k?

In general, I think keeping that much in cash is bonkers and absurdly excessive. I haven't once and don't know anyone that has had an emergency that required 95k, like ever in my life.

You are losing 2-3% per year or about $200 per MONTH keeping it in cash. Cash is very expensive and very risky.

34 and it is about 11-12%. I know it is too much. This is why I look for solutions.

 

[sengsational]

If you want to "play the game", you can get 1.5% on chunks of 25K. I've got one account where I need to make 10 transactions, any amounts, per month. That's not too hard, but I've missed it once. Google Kasasa Cash or go to http://www.depositaccounts.com/checking/reward-checking-accounts.html

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.

My HSA account gives me 1%, and I don't feel too bad about that.

 

[jlenhart80]

Where might one get 2 to 3% per year with no risk and high liquidity?

There is no such thing as a no risk investment. Anything you do has risk, including sitting in cash, which is inflation and can't really be hedged out or reduced as a risk. It is there eating away at your cash every day.

The closest thing you can get to are ETF's as far as minimal risks and high liquidity. Possibly selling cash secured puts or covered calls to reduce risk and generate income, but if plan A is just taking it on the chin from inflation, you really need a plan B.

Beer in the U.S. has 3-4% and it is quite liquid.

I never said a no risk investment. I said low risk. I do know of puts and covered calls but currently have no experience with them. I will have to do some reading. If you have suggestions of places to learn, I would appreciate some direction. Thanks!

 

[bad_LNIP]

If you have suggestions of places to learn, I would appreciate some direction. Thanks!

Read up on BXM and PUT from the CBOE. CLL may be the what you are looking for. They have a rolling collar strategy.

 

[jlenhart80]

If you want to "play the game", you can get 1.5% on chunks of 25K. I've got one account where I need to make 10 transactions, any amounts, per month. That's not too hard, but I've missed it once. Google Kasasa Cash or go to http://www.depositaccounts.com/checking/reward-checking-accounts.html

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.

My HSA account gives me 1%, and I don't feel too bad about that.

Thanks for sharing this as an option as I never knew something like this existed. I had a look at the site and some specific banks that were listed. I don't think it is a good option for me though. I travel a lot internationally and I'll probably forget to "play the game" and lose out on an easy 1.5%!

I'll keep an eye on this for the future though!

 

[jlenhart80]

I Bonds are an option, once you get past the year lockup. I have been moving $10k into those from my savings account each year for the past few years.

Right. I think this is a good way to get some safe investment to offset SOME of the inflation rate. It's a bit of a slow process to invest (at $10k maximum investment per person per year).

Good idea though! Thanks!

 

[mpeirce]

> cash on hand in case of emergency

For money that is really only for emergencies, another option to consider is a longer term CD with reasonable rules about penalties. A 5 year CD might get you around 2%. Often you can find one that has a penalty that's not bad like, losing 6 months of interest if you cash in the CD.

For example: you buy that 2% CD. In two years you need the money, so you cash it in. The first year you earn 2%, the second year you earn 2%, but lose 1% to the penalty. You still are ahead of the 1% savings account (3% vs 2%). And the longer you go without cashing it in, the more you are ahead.

Also, the penalty might dissuade some folks from accessing the money unless it really is an emergency.

 

[nwsteve]

My solution for parking cash includes Audrey 1's online MM accounts. I use Ally--about .9% and immediately available with a transfer to local bank. Also not quite as immediate but pretty quick is Vanguard's Short Term Corporate bond. Yielding about 1.8 %. Certainly not risk-free but pretty stable and tradable as an ETF (VCSH). I think if you hold in a Vanguard account you can even get check writing on it.
Nwsteve

 

[brewer12345]

I consider the money in "safe" vehicles to be part of my fixed income allocation for total portfolio. I like to spread it around. Some of it sits in a checking account earning bupkis. Some is in I bonds. Some is in various CDs (I buy whatever is a good deal, from 1 year to 10, but always with a reasonable early surrender penalty). I also keep a large, untapped HELOC. Generally speaking, my CDs and I bonds have earned well in excess of the yield on offer from a 10 year treasury over the last 5 years. Shop carefully and be ready to pull the trigger when a deal pops up (and they do), and you can do pretty well keeping up with inflation and taxes in CDs.

 

[calmloki]

We have cash in Barclays bank and TIAA CREF. Makes between 0.8 and 0.95%. Rare for us to have less than a year and a half living expenses in there, mostly have more. Oddly enough, the lesser amount is about what a medical adventure would have cost sans insurance.

The cash washes in and out as we make loans - a loan we made 5 months ago is about to pay off - we will make 7% on an amount greater than what we have borrowed from PenFed on our houses. So in 5 months we will have paid for all the interest a year of the PenFed loans charge, plus made 4% on the money in less than 1/2 year. Do a few deals like that and you don't mind sitting on a stack of cash. Not risk free, but something we are used too.

I like cash - lets us take advantage of deals as they come up, and the borrowing we did on our places effectively means we can have our equity making money and have cash in the bank - no need of the HELOC. Things would have to be pretty bad for us not to be able to meet our obligations. Like to think that using our Fidelity cards for everything possible and getting a 1 1/2 - 2% credit is like saving the amount we spend and earning 1 1/2 - 2%.

 

[liveanon]

Peace of mind is also worth something. I keep about 10% in cash. Maybe 30% or so is in CDs of varying terms. I work in a tough industry and layoffs have been a fact of life for several years. I feel better knowing I have a cash cushion as large as I do.


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[audreyh1]

Audrey I fail to see the complexity with puts or covered calls. It may be beyond your understanding but it isn't that hard. Not sure when hedging became a bad thing esp for so called risk averse people. If I really wanted to get froggy with it, I would have said throw a collar on it.

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