Cash Management 101
May 11, 2023
10
min. read
Today's headlines oscillate between the safety of your money and the importance of getting the most “return” on your cash in the bank.
Here's how to keep your money safe and best utilize your cash...
There are plenty of risks when you invest: inflation, recession, rising rates, war, bear markets, panics, etc. However, when you open a bank account, you’re likely not planning on having your money at risk. This lower risk is also why bank deposits don't have anywhere near the historical return of stocks or bonds.
Today, most bank deposit accounts don’t pay much of anything at all.
For starters, let's clarify what exactly we mean when we talk about cash.
Cash is defined as "legal tender, currency or coins, that can be used to exchange goods, debt or services."
As it relates to banking and finance, cash generally refers to any form of currency that is easily accessible and quickly turned into physical cash within one year. This broadly includes bank deposits, CDs, treasury bills and assets held in money market funds.
Before we explain how to best manage your cash, it’s important to clarify the definition of “money”.
At the Gleason Group, we define money as purchasing power. Said another way, money is what you can buy with it.
Therefore, the biggest risk to your money needed in the short term is the risk of loss and lack of access to funds. Preservation and liquidity are paramount.
However, in the long run, as prices continue to rise, as they always do, the biggest risk to your money is not a short term loss, but rather the erosion of purchasing power over time due to inflation.
Consider this: If you bury $1,000 in the backyard today and dig it out 30 years later… have you lost any money?
You may think the answer is “no” because you still have $1,000. That is until you try to fill up your car, pay your bills, or buy anything. When you do, you’ll surely see you’ve lost plenty of “money.”
If history is any guide, with average inflation of about 3% over a 30-year period, you’ll lose about ½ of your purchasing power. Meaning the cost of a dozen eggs today, will only buy you an estimated 6 eggs in 2053.
Now that we've clearly defined money and the risks associated with it, let’s break down how to best manage your cash right now…
Cash clearly has a place and a purpose, but it’s important to understand what the purpose is.
Cash is for preservation and liquidity.
It’s for short term living expenses, capital expenses, and emergencies.
Cash Is NOT a long-term investment vehicle.
Period. End of story.
It does not protect purchasing power over the long term.
Put another way, cash is a depreciating asset when it comes to your future buying power. A dollar worth of goods or services in 1950 costs $12.60 today. If you want more examples, check out this inflation calculator.
Bank deposits are funds the bank holds for a customer. In general, it's the sum of money kept in your bank account. Many people don't realize that when you deposit money at a bank, you're actually loaning your money to that bank (which is why FDIC insurance is important, more on that below). When banks hold your funds they are actually considered assets of the bank. In return for holding your cash the bank pays you interest on these deposits as well as providing you checking and other banking related services.
Assuming you have an account with a bank insured by the Federal Bank Deposit Insurance Corp (FDIC) or through the National Credit Union Administration (NCUA), your money is protected up to $250,000 for an individual, and $500,000 for a couple. To see if your bank is FDIC insured, ask your bank representative, look for the FDIC sign at the bank or on the bank website, or use the FDIC's Bank Find tool.
For Gleason Group clients, we go above and beyond this limit with the use of a Raymond James revolving bank facility that utilizes FDIC protection of more than 100 different banks, all in one account. Therefore, upon deposit, your money is immediately FDIC protected up to $3,000,000 for individuals and $6,000,000 for joint accounts. The only exceptions are ERISA related accounts such as SEP IRAs, SIMPLE IRAs, & SoloKs which are covered by standard FDIC limits.
It's also important to note that no depositor has lost money in an FDIC insured bank since 1933, which was before current protections were put in place.
In short, your deposits are safe in the bank.
Like bank deposits, when you buy a CD you making a loan to the bank that issued it. But unlike your bank deposits, which are immediately accessible, a CD locks in money at that bank for months or years at a time. If you need access to your funds in the CD earlier than maturity, you pay a penalty to access those funds.
It's trading liquidity and flexibility for yield.
Since a CD is a loan to the issuing bank, it's important to be aware of FDIC limits for protection of your capital as any amounts over those FDIC limits are not protected or insured.
In short, we do not recommend buying CDs. There's usually always a better option.
A money market fund is a type of mutual fund that invests in high-quality, short-term debt instruments, cash, and cash equivalents.
While not as safe as cash, they are still considered to be extremely low risk.
With the massive rise in interest rates over the last year, money market rates have been supercharged, many of which are currently paying north of 4%.
Like banks, money market funds come in all shapes, sizes, and compositions. And just like your portfolio, it’s important to know what you own and why you own it.
Money market funds are great for capital needs beyond your immediate depository checking accounts. These are best for savings accounts, large temporary cash holdings, or extended cash needs of more than 60 to 90 days.
We have vetted the entire universe of available money market funds and provide our clients with a simple, reliable and high quality solution compiled of 100% short-term US treasuries currently paying nearly 5% currently (5/30/23).
While there is nothing wrong with looking to maximize the return of your cash. It's a slippery slope and we advise against attempting to "make money" in cash, CDs, or money market funds.
It's important not to confuse a long term investment with an asset geared entirely for short term use. For a great example of this, look no further than just last year.
Remember I bonds?
Their promise of 9% returns was all the rage in 2022. Well, those have already evaporated. With inflation (and the CPI) grinding lower... so are the I bond returns which now pay less than half of their 2022 highs. Not only that, but these I bond payouts will continue to decline as inflation continues to drop in the coming months.
We're likely at or near peak interest rates right now for this cycle. Meaning money market and CD rates, like inflation, will soon be headed lower.
These current yields will be gone as quickly as they came.
So, while it feels good today, cash holders will look back and, like those I bond holders, be filled with regret of not having simply invested for the long term.
And where will the price of America’s greatest businesses be by the time the “storm” has passed? You guessed it, much higher than they are today.
In short, caveat emptor.
Our advice, as always, is to have a clear plan and purpose for your cash. Always know what you own, why you own it, and how to access your funds.
We suggest banking with high quality FDIC insured bank that makes your life easier. A bank that has branches close to where you live, has technology available to access funds, and reliable professionals who work there.
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Keep enough cash in your checking/savings account for emergencies and for any upcoming capital needs. If you need to hold cash for longer periods, let’s talk and we'll help you have a clear plan for how best to utilize it and whether we want to put it into the high-quality money market fund we've vetted for client use at our custodian Raymond James.
Rather than putting money in illiquid CDs, hunting for the highest yield on the newest money market fund, or hoarding cash to try to time the market, simply stick to your plan and invest based on your timeframe, risk, and specific goals.
How do you best do that?
That’s what we’re here for.
For more on our investment philosophy here's a refresher: How We Invest Your Money.
