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Where To Put Your Cash Now

January 18th, 2012 Leave a comment Go to comments

Even if you are fully invested, inevitably you will need to manage some cash. It’s a good idea to have some of your portfolio in cash in addition to a stash (“emergency fund”) that is very liquid to handle unusual bills or issues (things like car repairs up to more serious issues such as unemployment). My investment portfolio is about 30% invested in cash. I expect to reduce this over time but not to zero so that I have some powder to take advantage of opportunities that come up.

It was just a few years ago that you could earn enough interest on cash that you could call it an ‘investment’. Today, that’s no longer true, cash investments are providing very low returns.

Managing cash means putting the money in instruments that are designed to protect principal. There are many options here plus a bunch that you may think protect principal but don’t. Here are your options plus a few that are not cash.

First, Physical Currency

In my mothers generation, physical currency was a means to save money because there was a leftover distrust of banks from the Great Depression. Today, deposits are insured by the FDIC/NCUA. But probably the larger change is that banks today generally are not allowed to fail, they are merged or taken over by other banks before they fail by government regulators. So, bank runs have largely been eliminated.

Physical currency has a few downsides. You earn no interest and owning it bears no legal ownership (it can be stolen, lost, etc).

Bank/Credit Union Accounts

Cash at banks and credit unions provide various accounts that are FDIC/NCUA insured. While interest rates are low, you will at least earn something while keeping your principal intact.

  • Savings/Checking Accounts, 0.10%

To earn a little more interest involves putting your money away in a Certificate of Deposit (CD). Since we are likely near the bottom of the interest rate curve, keep your terms short (a year or less) so that you can quickly take advantage of interest rates when they eventually go up.

  • 1 year CD, 0.75%

A simple option is to “go long” and buy a 1 year CD. The rates for one year CDs are about the same as a MMF. You can get higher rates if you go longer, but this makes the money less liquid (which is one of the main benefits of a MMF).

  • Money Market Funds, 0.85%

Money Market Funds (MMFs), those higher interest accounts offered by banks and credit unions are offering piddling yields due to the low interest environment created by the Fed. It wasn’t that many years ago (maybe 2006), when these MMFs could earn 5.0% per year. That was a pretty good return for taking minimal risk with your principal.

Banks and credit unions put some restrictions on these accounts to offer the higher rates (though they are stil more liquid compared to CDs). For example, my credit union has a substantial minimum deposit amount to garner a 0.85% MMF interest rate. In this rate environment, this is considered a pretty good interest rate! Also, as a savings account, these accounts also have the “Section 204.2(d)(2) of Regulation D” restriction from the Federal Reserve Board which limits these accounts to 6 ACH (electronic) transfers per month.

So, be prepared to keep your money immobile to get this “high” interest rate!

Money Market Mutual Fund

So called Money Market Mutual Funds (MMMFs) offer higher rates, but there is no free lunch here. These funds are typically found at your broker or in your retirement accounts. The SEC is proposing to regulate MMMFs to create transparency in their pricing. Some of the funds juice their returns by using derivatives which if correctly valued may necessarily mean that they “break the buck” in their valuation. This doesn’t mean that they are bad or risky, but they are in fact more risky than other funds. Also, keep in mind that these investments are not FDIC/NCUA insured as savings/checking/MMF accounts at credit unions or banks.

For the cash in my retirement accounts, I use these MMMF, or similar Stable Value funds. Where the Cash is in your 401(k).

Treasury Savings Bonds

The U.S. Treasury offers two products that protect principal and offer either a consistent rate of return, or one based upon inflation. These products differ from MMFs in that these are longer term investments (minimum 1 year holding period and no penalties if you cash in after 5 years). Don’t confuse these products with other Treasury Notes/Bonds that are priced at market rates. These don’t protect principal. If you are unsure, look for the words “Savings Bond” in the investment name.

If you cash these in prior to the 5 year holding period, you get all your principal back with a penalty of 3 months interest.

Each person can buy up to $10,000 worth of these bonds each year. The U.S Treasury makes it easy to buy them, you can buy them direct with no fees. An electronic link to your checking account is the easiest method. Check out the links above to buy these savings bonds.

These Investments Are Not Cash

The following investments are not cash because there is a risk of losing principal. This doesn’t mean that they are necessarily risky, but just that they are not designed to protect principal. (For example, Treasury bonds are not inherently risky, but they are priced to market).

All of these investments are priced to market, which means that they can be bought and sold for a gain/loss.

  • Bond Funds.
  • Stocks.
  • Treasury Notes/Bonds – You get all your principal back when held to maturity. If you sell prior to that, you can make/lose money.
  • Gold/Silver – Commodities don’t earn interest and can either lose/make money.
  • Corporate Bonds.
  • Municipal Bonds.
  • Preferred Stocks.
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  1. January 18th, 2012 at 11:35 | #1

    If you compare historic returns with IBonds, today’s rates are really bad. But compared to other safe investments today, IBond rates are actually pretty good! It’s all relative!

  2. January 25th, 2012 at 23:17 | #2

    When markets are moving up as they have been the past several weeks, making money in stocks is very rewarding. I’m not holding much back at this time until my positions, which are all up for a profit, start to dip… then, I’ll put the profits in my pockets and raise some cash.

  3. February 10th, 2012 at 18:53 | #3

    This is one of the areas I’m working on this year. Last year I remained fully invested and rarely had capital on hand to take advantage of some really good buys during the volatility of the last quarter. Some lessons you learn the hard way. I’m taking the first quarter of this year to build up my cash reserve and then I will keep adding to it.

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