KCA Wealth Management advises each and every client to always ensure they have cash on hand, regardless of their stage of life, but that doesn’t mean stacking bills under your mattress, or in a safe.
Cash, as defined by, Investopedia typically refers to money in hand, but can also be used to indicate money in banking accounts, checks, or any other form of currency that is easily accessible and can be quickly turned into physical cash. Managing this cash, be it physical dollars, a certificate of deposit, or money market account is important regardless of age.
Although interest rates are at an all-time low, depositing your cash should yield you return. Even at just 1% return, on $100,000, an account could yield you an additional $11,000 per decade! As we always advocate, every dollar matters in retirement. Further, although interest rates remain low today, it does not mean they will indefinitely. In fact, rates reached above 10% during parts of the 1980s! There are a variety of ways to keep your capital liquid, while also receiving a yield. They generally include, from roughly most liquid and conservative to least: Savings Accounts/Money Market Accounts, Virtual Banks, CDs, and Short-Term and Ultra-Short Term Treasuries/Bonds.
Why Cash is Essential Part of Every Strategy
Regardless if you are just starting your career, or decades into retirement a proper cash strategy ensures liquidity and consistency. KCA Wealth advocates strongly following a strategy similar to that of “The Bucket Plan”, which teaches the necessity of “three buckets”. The buckets consist of “now”, “soon” and “later”, with the first bucket being short-term, with the goal of safety and liquidity. It should be filled with funds for the next 12 months of income, emergencies and any planned expenses. The “soon” bucket is invested comfortably, and is ready for withdrawals in the near future; the investments in this account will be fairly conservative, but still have a goal of outpacing inflation. Lastly, the “later” bucket, which includes long-term growth like assets for your heirs, long-term care, disability, and other end of life concerns. The “later” bucket is full of assets for financial obligations ten or more years out primarily.
Having these three distinct buckets ensures you can cover your bills and expenses, without worrying about the market whatsoever, with full liquidity. While the mid-term bucket provides safe returns over the next several years, in case of a market downturn, while your long-term bucket provides the high-growth returns required over decades to build a substantial nest-egg for yourself and family.
Money Market/Savings Accounts
Money Market and Savings accounts pay some of the least yield of all accounts, however, they play an essential function being the most liquid only to cash or checking accounts. It is important to learn the rules of each account, but many allow a set number of transactions each month. Federal law used to limit transactions (both withdraws and deposits) to just six, however, this changed in March of 2021.
Oftentimes, depending on your institution, the main difference between accounts is a minimum balance. In fact, regardless of account the higher the deposit, often the higher the yield. It is important to take notice of these benchmarks, and account if holding a higher minimum balance is worthwhile.
In fact, money market accounts are typically the better of the two, however, the minimum balance must be held to be eligible. Money market accounts typically provide an ATM and check book, which savings accounts do not, allowing you to hold your cash in a pseudo-checking account, but still receive a nominal amount of interest. A common and worthy strategy is paying your largest couple expenses out of this account, as well as transferring immediate cash necessities to checking monthly or quarterly. This provides peak return, without ever sweating cash on hand.
Virtual “online-only” Banks are new institutions with the birth of the internet, and more specifically, digitization of the economy and dollar. They often offer higher yields, lower fees and easier access to your money, digitally, due to their online platform with lower overhead. However, those used to visiting a branch, or speaking with a banker in person, may be left disappointed. Although many online-only banks pride themselves on customer service, it can be challenging for those used to visiting a branch. Further, many have established a great system of ATMs, to provide you cash quickly, however, they can oftentimes lead you to fees if an ATM in the network isn’t able to be located. Lastly, access to your cash can be completely lost for days, in the case of a lost card, and making a large cash withdrawal is not possible. Also, depositing cash to a virtual bank is cumbersome at best, if not impossible.
However, building a system and connecting a virtual bank in tandem with your brick and mortar bank can yield significant benefits. In fact, most offer an additional 1%-2% additional yield on savings accounts! These funds are more liquid than CDs in many cases, without the fees of early withdrawals. This can make them a great choice for many individuals needing access to funds without the need for cash deposits or withdrawals.
Certificates of Deposit (CDs)
According to the Securities and Exchange Commission a certificate of deposit (CD) is a savings account that holds a fixed amount of money for a fixed period of time, such as six months, one year, or five years, and in exchange, the issuing bank pays interest. Many banks, and even brokers, offer certificates of deposit that can range from months to years, and have fixed or variable rates of return. Most guarantee no risk to your initial principle, but can carry hefty fees if withdrawals are made prior to maturity. Because of this, when considering a certificate of deposit it is important to evaluate not only the maturity date, but penalties associated.
Fixed CDs provide an investor piece of mind on the exact rate of return they’ll be provided, while a variable rate provides investors with a chance at higher returns, if rates increase. Further, more complex CDs, such as equity-linked CDs tie returns to that of index funds. Although these can be very rewarding, and often shield your principal from risk, it is essential you consider any penalties associated with early withdrawal. Further, many equity-linked CDs provide higher rates of return, but only with a multi-year certificate, which at times can be counterintuitive to a strategy of short-term cash holdings. These longer-term investments fit far better into your second mid-term bucket.
Many CDs are offered at your personal bank, however, shopping rates can be worthwhile. Even some Brokered CDs offer higher rates, however the fine print is essential to be read as they may not have the same insurance and guarantees.
Most of these accounts are insured up to $250,000 by the FDIC for banks and NCUA for credit unions, however some equity tied and broker CDs do not provide this protection.
Short-Term and Ultra-Short Term Treasuries/Bonds
The advent of the internet, and low-cost index funds, has revolutionized the market. In fact, it has provided everyday consumers easier access to funds and financial instruments in the past. The basis of many institution’s yields are based on those of ultra-secure bonds and treasuries themselves.
However, short-term funds can provide you with the variability of true market rates, rather than the fixed rates offered by many institutions. Also, these funds often offer higher yields than money market instruments with less fluctuation than a typical short-term fund. In addition, higher yield can be chased on short-term funds that invest in corporate bonds, rather than treasuries. However, risk tolerance must be considered. Although these types of funds have significantly less risk than those of equities, they still can see significant losses in the double digit percentage range, such as some funds' declines in 2008 and 2020.
These are speculative investments and carry no insurance, nor do they provide any FDIC or NCUA protection.
All in all, there are nearly endless options for your cash savings, and nearly every individual's unique situation warrants a different strategy. At KCA Wealth Management we are committed to our community and clients. Each and every individual, regardless of client status, we strive to inform and assist through their financial future. We hold and commit to the tools, information and designations our team and leadership holds. We are always excited to meet with anyone interested in learning more about our firm, assisting them in grading their financial health, and helping them achieve the future they desire!