Where to park some cash just in case we needed it.

When I was reorganized out of a job I took the option to receive a severance package rather than a different job at the same company. Due to my tenure with the company I received the equivalent of a year’s salary in one lump sum.  

We needed to figure out where to park some cash just in case we needed it.

I knew that this severance would carry us through a job search and the increased costs for healthcare (I flipped to a COBRA health insurance plan).

In addition, we had built up an emergency cash fund that would cover a year, or more, of expenses. If it became necessary, we could reduce routine expenses to stretch that even further. NOTE – We went ahead and reduced routine expenses rather easily I might say – which is a lesson in itself that it is pretty easy to cut household costs.

Our emergency cash fund had been sitting in a bank savings account for years. Looking back that was not the best place to keep it since the itsy bitsy interest rate was so itsy bitsy. At the higher than most balance we carried we only were earning maybe 0.03% annually. When I realized this I knew I needed to move the cash to something that would earn more and still be easily accessible and safe.

RonP_Set_It_Forget_it

I started by refreshing myself on basic financial instruments. It was amazing that I had really not worried much at all with our cash investments and the return we were getting. I tracked in detail our investments and kept up with the dividends, interest and rates of return. However, on the cash side it was like I was in Ron Popeil mode – “Set it and forget it.”

Here are some options to park your cash should you need it to be accessible:

Checking Account

Well, ok, this is probably the most accessible and least income earning place. Checking accounts are FDIC insured if you are worried about that. You can park cash here with a brick and mortar bank and get maybe 0.01% or with an online bank for maybe 0.10%. The benefit of checking is ease to write checks to pay for things. If you choose this I would go with a solid online bank service.

Savings Account

Similar to a checking account, savings might get you a little bit more in interest. Checking accounts are FDIC insured if you are worried about that. Say 0.03% for brick and mortar and 1.85% from online (I checked Ally Bank). The online rate is actually decent as of late since interest rates have been rising. The potential downside on a savings account is that banks usually do not want a lot of individual transactions in a month. If you choose this I would go with a solid online bank service.

Money Market Account

Before you look at this you need to understand the difference between a money market account and a money market fund. A money market account is FDIC insured like a checking account. A money market fund is like a mutual fund and is not typically FDIC insured.
Money market accounts are usually somewhere in the middle of checking and savings accounts. Using Ally as a reference, their money market account rate for $25,000 is 1.00%. Like savings accounts, banks will limit or charge for too many transactions in the account. If you choose this I would go with a solid online bank service.

Money Market Fund

Money market funds are tradeable securities like a mutual fund. The fund works to keep the share price at $1.00 and the Securities and Exchange Commission (SEC) has rules to keep investments short term. Many look at money market funds like a money market account but you need to know that funds are not FDIC insured.

While it is extremely rare for money market funds to get into trouble (eg – share price goes below $1.00) it has happened. Way back in 2008 (sarcasm) it happened and when people started withdrawing huge amounts of cash from funds one or more funds had serious issues.

There is no set interest rate, though recently money market funds have been earning around 1.00%.

Uncle Sam T-Bills

Treasury Bills (T-Bills)

T-Bills are short in duration – from days to up to 52 weeks. You can purchase individual T-Bills or you can just use a Money Market Fund (see above) which typically has T-Bills in the fund. These are considered very safe and are backed up by the US Federal Government.

T-Bills do not earn interest. The way you can make money on a T-Bill is that you typically purchase at a discounted rate. For instance, a $1,000 T-Bill might be purchased for $975. At maturity you receive the face value of $1,000 – thus making $25.00.

Treasury Notes are longer term (2-5 years) and Treasury Bonds are 30 years. Notes and Bonds earn interest payable during set times over the length of the term.

Certificates of Deposit

Say what? People tend to think back to their parents day when CD rates were in the 10% range back in the 1980’s. You will see the trends on interest rates for CDs have not been kind lately.

CD’s are like savings accounts with two key differences. First, if you get a CD you cannot cash out early (or there may be penalty). Second, the interest rates are typically higher since you have to lock in your money. The similarity with savings accounts is that CDs are also FDIC insured.

With the recent interest rate uptick a 12 month CD rate is around 2.50%. Now that is not like a stock earning 7.00% but you want a CD for ease of access and security.

Bonds

I am not going to cover bonds or bond funds because I personally view those are more long term investments. Actually, as it relates to bond funds – we never invest in those, we only invest in individual bonds.

After reviewing options I started trimming the list down based on our personal needs. Since I was in between jobs I needed to park this cash somewhere that could be fairly easily accessed if needed. As I mentioned, we also came to realize that our emergency fund cash balance needed some better attention to move it somewhere to get a little bit more return.

We ruled out brick and mortar banks. We grew up with the brick and mortar banks and never had looked at online banks. These days I am sure the younger generation is completely comfortable with an online bank. Heck, the fact that we have maybe gone inside the lobby or drive thru lane a couple times a year made me wonder why I was sticking with a brick and mortar bank.

Even after looking at online banks and their savings rates I thought we could do better.

Just about all our investments are with Fidelity Investments so I started poking around their website to learn more about options with them. We knew we wanted more return than a money market account or money market fund would offer. We knew we did not want to use bonds for this purpose. Trimming all those options down it left CDs. Was I really looking at my father’s safe investment vehicle that gave him a 10% interest rate (but realize that inflation back then was high also)?

Well, recall I started by saying we neglected our emergency cash fund for years. Effectively savings rates have been zero – ok, maybe 0.02% for too many years. I just left my money in a savings account earning a pittance of a return on my money. I am sure the bank I was using was happy!

I looked at the CD interest rate trends from recent times (below)

CD Rates 2013-2017

Source: https://www.depositaccounts.com/blog/cd-rates-survey/

CD rates had started going up in mid to late 2017 and have continued to go up. Realize too that during this time the Fed had started raising interest rates on banks, which trickles down to borrowers, which trickles into higher inflation.

At the same time CD rates were going up, checking and savings rates were flat.

As we were researching CD rates we came across the word “ladder.” OK, what does a ladder have to do with CDs (or bonds for that matter. I considered myself a decently educated investor but since I never focused much on CDs or bonds I was not familiar with this concept.

What is a Ladder (for CDs or for Bonds)?

A CD Ladder is a strategy to that uses multiple CDs at various maturity periods to maximize your interest rate return. Typically CDs that are longer in duration offer more interest. A three month CD might offer a rate of 0.50%, while a one year CD offers you 2.50%. Since you are committing to not accessing your money the CD pays you more in return.

We decided to pursue the CD ladder strategy and here is what it looked like in April 2018.  We took the total cash we wanted to set aside and divided it into four even amounts and bought the CDs below:

Three month CD               1.65%                    Expires July 2018

Six month CD                    1.85%                   Expires October 2018

Nine Month CD                  1.95%                   Expires February 2019

Twelve Month CD             2.15%                    Expires May 2019

The benefits of laddering how we applied it, is that every three months we have a CD maturing and we can decide to just keep it in cash or do something else with it. 

For instance, when our July 2018 CD matured, the three month one, I bought a new twelve month CD at 2.45% – which was higher than the twelve month CD we already purchased. When I did this, the new twelve month CD will mature in July 2019. Thus, we maintained the three month rolling maturity date.

However, if at any three month maturity period things changed, we can decide to divert that cash into a better investment, leave in cash or buy another CD.

As I was researching to write this post I came across an article that opened my eyes a little wider. It’s one of those things where it’s right in your face but until it smacks you it might not get your attention.

The writer recommended that in times of rising CD interest rates, you should consider short term maturity CDs. While short terms pay less than longer terms, if the interest rates are going up, the short term allows you to react quicker to those rising rates.

Well duh! That is Econ 101 but until I read it, it did not click. Then again, for like the last 10 years interest rates paid on your money have totally sucked. So, now as the CDs mature, I am paying more attention to forecasts on interest rates as I decide to buy another CD or make another choice.

This by no means is sexy investing stuff. Some may call it pretty boring and bland. However, sometimes you need to park some cash and want to avoid the risk of losing principal. At the same time you want to get at least a little more than a bank savings account interest rate.

I started this blog post by mentioning a change in jobs. That was back in February 2018. In June I accepted a new job. That means we still have about six months of severance pay that we are targeting not needing and can probably invest with higher returns. 

However, for the short term we are keeping the remaining severance money in the CD Ladder since my new job salary is half of what my old job was. We have adjusted our expenses down and we also know that we are already F.I. so we will just monitor things closely and make some decisions over the next year.

Resources for CDs

I found that Fidelity Investments had some good information about CD’s.  Their Fidelity CDs page has a basic overview.  CDs are not complicated but for someone new to investing check it out.

Fidelity also has a CD ladder page that guides you through purchasing through Fidelity.

Another independent website that explains CD ladders is Nerdwallet

I also use Bankrate to research at a high level savings rates, CD rates, etc.  Just click on banking and then the type of product you want.

Interest.com has an article that is interesting where it combines several things to consider when looking at the recent upward trend in CD interest rates.

What financial instruments have you made to earn a little more interest while maintaining access to cash?

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