Let's talk about cash. Cold hard cash. The Green Stuff. Our primary economic medium of exchange.
For the last 12 years, we've treated cash pretty poorly. Many of the major banks will pay you essentially nothing for keeping cash with them.
The Federal Reserve Bank has continued a strategy of lowering interest rates so that the return for those of us who hold cash is next to zero.
But it doesn't have to be that way. Cash is a very important component of your overall wealth strategy. And I feel, that you should spend some time managing your cash position, just like you manage your stock portfolio.
So if you'll bear with me, I'll walk you through the way I manage cash for my own account and my clients. And for the purpose of illustration here, let's assume that you have $10,000 dollars in cash that you want to manage. And that you want to keep these funds liquid.
Perhaps you have a major bill coming due, such as a tax bill, or tuition payment or major purchase. So, you want to keep those funds available, and you certainly don't want to loose money while you're waiting.In other words, you want safety and liquidity.
Now at this point I'd ask whether you know exactly when you'll need the funds? Perhaps you have a major tax bill coming due, and so you know you'll need the funds on April 15th. And its great if you know a date certain, then we can manage your cash to that date. In this case perhaps a T-bill or Certificate of Deposit, that comes due then might be a good choice.
But most often people don't have a specific use for their cash, and they usually don't have a specific date when they'll need to use it. So we'll be looking for an investment that is entirely liquid, and can be drawn down at any time.
To give us some perspective, I went to my local bank, Chase Manhattan and looked up their current rate for a savings account. Answer: .01%, or to put that in the Street's term: 1 basis point. In our example of $10,000 in cash to invest, Chase would pay us a whopping $1 interest per year.
Nope, I'm afraid that's it. Now if you have a large balance and want adhere to certain restrictions, you can up that to $4 per year. But basically that's it. And the other 3 members of the big 4 banks look to be about the same. You're hard-pressed to get about 20 in interest from the big 4 currently.
But let me show you how we beat the banks. If you do have cash to manage, let me recommend my favorite website for getting current savings rates. The site is Bankrate.com.
Bankrate.com will give you a list of all the current consumer interest rates. Rates such as mortgage rates, car loans, CD rates and so on.
But today we're interested in short term savings rates, or money market rates. Now, as the name implies these are money market rates offered by banks around the country.
We will look at money market mutual funds in a moment. And as I'm looking at the list I see that number one pays 1.95% interest for a money market account. But I don't know this bank, and its the only one at this high level, so I'm Leary about using this one.
However, right below it is a couple of names I know: Goldman Sachs and Sallie Mae (the Student loan people), and they're paying 1.75% interest. That's $175 in interest per year.
Sure beats less than $10 over at Chase Bank.
But we're not done yet. There are a couple of more places I'd like to check before we suggest where to place your cash.
Next stop a look at the Money Market Mutual Funds. The three Money Market Funds I usually look at are Vanguard, Fidelity, and Schwab. And today we see that they are also yielding in the 1.70% plus range. About the same as the bank money market funds.
Finally, I look at TreasuryDirect.com. This is the US Treasuries own website, and it lists the current yield on all the Treasury Bills that they are offering.
Now T Bills don't exactly fit our profile, after all, they are due at least 30 days from now. But they do give us the current risk-free yield. And that risk-free yield is a little over 1 1/2%.
And that's really all there is to it. From here we would look to see what was most convenient for you to choose. Do you already have an account with one of the banks or brokers who have an attractive money market yield? Or is there another option that you find attractive.
After that it's just a matter of funding the account and taking advantage of the better yield.
Now just a note on why these different financial institutions offer such different yields. Well, the answer is really in how the fund, bank or broker is structured. Banks price their products based on the overall balance sheet of the bank, including their loans. Their objective is to make the biggest spread between their cost of funds (which your yield is part) and their offerings, usually loans.
Money Market mutual funds, on the other hand, is simply a portfolio of different money market instruments, such as commercial paper, Institutional CDs and Treasuries of different maturities. So their portfolio can go up and down rather quickly. Over the last few months, we've seen these Money Market Mutual Funds yields jump in concert with recent Federal Reserve moves on interest rates.
Finally our disclaimer, this was not meant as a recommendation of any particular security.
Rather I hope this introduced you to a process that you can use to pick the best money market investment for you.