I often get questions about which savings account pays the most. To my mind, this is a distraction from many other, much more important questions, because anyone who has enough money to be worried about interest shouldn’t be keeping much cash on hand. However, if a big expense is coming up, it might make sense to have significant amounts of cash on hand. So let’s do a post about cash storage.
Rich folks have a few extra considerations with regard to storing cash. Middle income households might consider $3500 to be a sizable amount of money. That might represent a month’s rent, or even most of a vehicle! But for a retired family with $15M, $3500 is probably closer to three days of conservative spending, on average. Generally, even a financially independent household should keep one to three months of cash on hand,1 and throw in savings for next year’s tuition, or a high end home renovation, and a wealthy family can easily blow through FDIC limits.2 Given Silicon Valley Bank’s recent collapse, worrying about whether my bank is going to give me my cash back when I need it is the last thing I have space for in my brain. What can we do to solve this problem once and for all?
Keep a checking account. This works great, as long as I stay under FDIC limits. It’s hard to live without a checking account, so I’ll want at least a bit of money here.
Play games with FDIC limits. I can put $250K away for myself. Then, I can put $250K away for my spouse. Then, I can put $250K away in a joint account for myself and my spouse. Then, I can open accounts in other categories or at other institutions, and juggle money between these accounts. That’s a hard no. Who has time for that?! So this eliminates most CDs, checking, and savings accounts.
Use an institution that will play games with FDIC limits on my behalf. Some banks will, behind the scenes, go open all those accounts for me. Unfortunately, they often still only pay 0.5% or whatever on the checking accounts, and the savings accounts at these institutions aren’t much better.3 Look. I don’t mind paying for service. But I also don’t enjoy giving money away to giant banks. So I’ll pass. No thanks!
Use a money market fund. OK, now we are starting to relax the absolute guarantees against losses that FDIC insurance provides. But we’re rich, so we can afford a little risk, right? In 2008, a single money market in the entire country “broke the buck” and failed to immediately pay all the money back to the depositors. That’s not that much risk for only a few months of expenses, considering the vast history of money market funds. On the other hand, a random search for “money market rates” turned up “Top 10” listicles with accounts paying 4%. 4% at the time of this writing is highway robbery! Again, this isn’t about the money, this is about not making donations to large financial institutions as a matter of principle.
Fortunately, there exists a financial product that receives just as strong a guarantee as FDIC insurance, has no cap on the amount you can store in it, and has never seized up or stopped trading except when all markets are stopped everywhere: ultra short term USA federal Treasury bonds, aka T-Bills.
T-bills always pay very close to the highest risk free rate available. They have the full faith and credit of the USA and the world’s most powerful military alliance behind them, and they’ve never failed to pay the interest they owe. And while they require you to lock up your money for a few weeks, the Fed considers it one of its three core missions to ensure that the Treasury market remains liquid and deep, so you can always sell a T-Bill for very close to what you paid for it, plus some interest. Even better, T-Bill interest is exempt from state income tax!4
Unfortunately, there’s one downside. Annoyingly, T-Bills require constant “rolling,” which means that when it matures, aka gets paid back, you have to go out and buy another T-Bill! Some banks will do this for you, but there’s a secret trick to get this feature in any brokerage account, which brings us to…Ultra short term Treasury ETFs do all that rolling for you, and while they do take a small fee to do so, at a good issuer that represents a tiny amount, about 1/100th of the interest that T-Bills currently pay as of this writing. Even better, ETFs from issuers that are probably “too big to fail” are available in every brokerage account. This is where the Solving Wealth family stores excess cash. I can always get money in my checking account within a couple days notice, and use my credit cards or credit line to cover things in the meantime.
Looking back at the history of these ETFs, their value did decline once, for one day. In the middle of the Fed’s recent rate hikes, which were the most aggressive rate hikes in the history of the Fed, the value of the ETF we used declined down to 99 cents on the dollar for a single day before recovering the next day.5 That’s a level of risk that I find acceptable, but you do you.
If you are feeling lucky, you can move from ultra short term Treasuries to merely short term Treasuries. Probably you’ll make a little extra interest! But I don’t keep much cash around, so I’ve not bothered.There’s another option that’s appeared on the scene recently! A new ETF uses a combination of carefully purchased options or futures on the S&P500 to simulate the return of T-bills. Even better, the issuers of this ETF are of the opinion that instead of earning interest, you earn capital gains!6 While the S&P500, which represents the 500 largest stocks in the USA,7 is probably the second most liquid and deep market in the world, futures markets are esoteric and have all sorts of weird behaviors, and a futures market is always less liquid than the underlying market. For example, if you can’t explain what a “gamma squeeze” is, then you don’t understand how these funds work.8
I don’t keep much cash, so I’m not interested in all this extra complexity for a slightly better tax treatment. You might disagree!Every option so far has concentrated on numbers in a USA account. However, there are more exotic ways to store value. Actual physical cash is always an option, although that requires worrying about theft, fire, etc. Foreign banks will store dollars, euros, and other currencies. Stablecoins will let you store unlimited amounts of dollars on the Ethereum blockchain, and walk around with them literally in your head by memorizing 24 words, or you can keep them on a USB stick. Personally, I’m not into making myself a kidnapping target, so that’s a hardcore “No” for me, beyond a few bucks of spending money I keep on my money clip when I remember to hit the ATM. As to physical cash, I just don’t use much any more! It’s too inconvenient.
For the rich, cash shouldn’t represent more than a tiny fraction of your net worth, so getting worked up about 4% vs 5% interest is definitely not worth your valuable time.9 Still, people ask, so it’s good to have answers. When your friends ask you, now you will have great answers for them, at least until the next time the financial landscape changes!
Some of you may be annoyed that I didn’t recommend actual symbols that you can look up in your brokerage account for the T-Bill ETFs. However, I’d like to point out that I’m a random person on the internet with no professional qualifications, and that recommending investments is a licensed activity, even though getting one of those licenses doesn’t require you to keep the best interest of your clients at heart.10 It would probably be fine for me to list the symbols, but I don’t like hassles, so I’m going to play it safe this time. Google for “ultra short term treasury ETFs” and you’ll find some nice options to choose from. Look at the expense ratios, the average duration, the “SEC 30 day yield”, which is close to the amount of interest it paid over the last 30 days, the price history, which you should compare to what the Fed was doing at the time, and you can pick one, and then never have to think about this ever again.
I find it annoying to keep only one month of spending in my checking account, so we tend to let it fall to one month and then refill it to three. I don’t like to have to think about whether a check will clear or whether I can pay a credit card bill. Keeping a bit more cash on hand frees up my brain for other things.
The limits are $250K per institution, per account category, per unique titling on the account. I think you see where we’re going here.
There are apparently a couple institutions that now offer over 5% and have FDIC limits over $1M. That works great if you already have an account with these institutions and don’t need to store more than their limit. I still like my plan, since these instutions could change their mind about the interest rates, the limits, or I might need to exceed the limit.
Remember what I wrote last post about not having any professional qualifications? I still don’t have any! I’m not a tax professional, and I’m certainly not yours! You’re smart, so you’ll double check this from an actually authoritative source like the IRS website or your CPA, right?
Remember, bonds lose value when rates rise, and the longer duration the bond, the more value it loses. So 30 year Treasury bills with 29.5 years left on them lost a ton of value on the open market when the Fed hiked, but 4 week T-bills with 2 weeks left on them lost only a tiny amount, which quickly was overshadowed by the higher interest rate the next set of bonds paid out over the next 4 weeks. That’s why we use an ultra short term fund, which keeps a mix of T-bills who’s duration averages out to about 5 weeks.
Between last paragraph and this paragraph, I did not receive my CPA certificate. I also didn’t graduate law school and pass the bar with a specialty in taxes! And while the people behind the fund may be tax professionals, or have consulted tax professionals, remember that tax pros often disagree about cutting edge tax law. https://www.taxnotes.com/featured-analysis/tax-trap-inside-boxx/2024/03/08/7j8x0
Mostly. Standard and Poors sometimes randomly decides not to add a stock to the index for extended periods of time. Famously, by the time Tesla was added to the index, it was already one of the largest companies in the world! They must have thought it was a meme stock and therefore the valuation was extremely temporary. Well, they were right about the first part, and the high valuation was only somewhat temporary, so it never fell low enough to fall out of the S&P500.
Gamma squeezes got famous during the whole Gamestop saga, where a bunch of ragtag retail investors realized that if they purchased enough Gamestock derivatives of a certain type, that would force their brokers to go purchase the actual stock in order to stay within certain risk limits. Of course, that purchasing caused Gamestock’s stock to go up, which sent some hedge funds who had been shorting the stock into panic mode, forcing them to purchase the stock to pay back their short position before they lost too much money, which caused the derivatives to pay off hansomely.
Let’s assume you value your time at $500/hr pre tax, and plan to keep $100K in cash on hand. You’ll probably earn an extra $1000/year, or about 2 hours of your time. If you plan to go open an entirely new bank account at a new institution every time you can get a better rate, you’ll generate more statements that you have to file, more 1099-INTs that your accountant will charge you for come tax time, and probably end up doing more than 2 hours of work for that money! If, instead, you get the ETF option, you’re only missing out on perhaps 0.2% interest, or $200 a year, and the paperwork is included in your existing brokerage account. It’s a win on time and close enough on money!
https://money.usnews.com/financial-advisors/articles/inside-the-new-dol-fiduciary-rule-change
The new rule only applies to retirement accounts, and gives over a year for financial advisors to continue to rip off their clients, assuming it ever takes effect!
In India, this kind of crazy regulatory regime that creates paperwork and licenses with little to no benefit is famously called “The License Raj,” as a callback to the oppressive rule by the British during their colonization of the subcontinent. What do we call it in the USA?