What to do with cash in 2021?

[chasing_FI]

Hoping I could get some thoughts on what I should do with extra cash in 2021.

First, I am very happy with where my asset allocation is at.  I do continue to contribute a lot of money to stocks through my 401k, Roth IRA, deferred compensation plan, HSA, taxable monthly ACH plus my spouses SEP IRA.  So, hoping to move extra cash into something similar.  CDs, bonds, etc would be okay with me.  I had opened a good deal of CDs before interests fell in 2020, but they are maturing and the reasons I needed them no longer exist - which leaves me with extra cash.

Currently
-Ally Savings at 0.5% - $75k
-Ally CDs ~2% in aggregate maturing in 2021 - $54k
-Ally CDs ~2.5% in aggregate maturing between 2022 & 2024 - $30k
-HM Bradley at 3.0% - $22k (wife's $1200 monthly paycheck being added every month)
-EE Savings bond-$10k started in 2020, in 2040 will double to $20k (no state taxes, def federal until 2040)
-Only debt is $47k student loan debt at 1.6%, I will get my AGI low enough in 2021 to deduct the interest, but most years I am unable to get to that threshold.  This is a monthly payment of only about $240 for the next ~19 years.

My questions for all of you nice people
-Should I pay off the student loan debt?  Emotionally this would feel great.  My income is pretty high, even if legislation gets passed to forgive student loan debt I am not sure I will qualify but who knows for sure.
-Should I load up HM Bradley to the $100k limit for the 3% interest rate?  I could apply for their credit card which would increase it to 3.5%
-Should I purchase more EE savings bonds this year - essentially like a 3.6% annual return if kept 20 years and do not have to ever pay state tax (My state tax bracket is about 6.5%) and defer federal until 20 year maturity.  Could do up to $10k for both myself and my spouse per year.
-Should I buy I bonds?
-Should I keep in savings but move the money around to get sign up bonuses to make the effective yield higher?
-What about any other high yield savings accounts?  Are any of you using other creative banks that give higher yields with certain requirements?  Thinking of various credit unions, etc.

Thanks in advance for any and all suggestions.

[FINate]

You seem to have a lot in low-risk investments for someone in the accumulation phase. That's not necessarily bad, just strikes me as odd. Maybe you're risk averse? Also not a bad thing, key to long-term investing success is knowing oneself.

In anycase, if you're happy with your asset allocation then just spread the money around according to your AA. That's how AAs work.

I would not seek to increase your bond holdings unless this is part of rebalancing your portfolio.

The student 1.6% student loan is essentially free money. Leave it on autopay and don't worry about it. If your AGI is going down for reasons other than taxes, and or if you can get your AGI down without leaving money on the table (e.g. shifting to capital gains instead of income) then that's fine. But don't lower your AGI soley for a tax write-off on a 1.6% loan. Not clear what your plan is here, but I've seen far too many people torture their finances to avoid taxes and end up worse off financially.

[chasing_FI]

Thanks FINate, I do understand you comments.

-My wife was seriously considering buying a business in late 2019 - early 2020.  We held onto some extra cash because of this.  She ended up getting lucky and choosing not to buy the business, it would have not done well in a COVID-10 environment so we got lucky on her final choice not to buy it.  We did end up throwing a good bit of money at stocks in spring 2020, did pretty well.  Did not throw it all at stocks because suddenly my job seemed to be at risk.  Anyway, out asset allocation overall feels right to us.  We do currently own a lot of stocks and will continue to buy.  I do think we will end up flexing some of the extra cash into equities, but probably not a ton.  Stock values rose so much lately that our asset allocation would be okay with keeping some in bonds/cash, etc.

-I do not purposely push down our AGI to be able to tax defer the student loan interest.  It just kind of will happen that way for 2021.  We have a lot of levers we can pull to get down AGI, so we can essentially set it where we want.  One thing we did this year was increase deferred compensation amounts a large amount as a way to get rid of some cash and get it working another way, plus a few other tax reasons.  I feel comfortable doing this sort of thing for a few years, but don't want the risk of having too much net worth in deferred compensation.

-The student loans kind of drive me crazy.  They are the only debt we have, I took them out in 2004-2005.  Just an emotional thing.  I totally get your point on it being "Free money" since we pay less than inflation is most years.  I do get it.  Sometimes, I have found that identifying the emotional portion of investing/personal finance is important though.  My spouse and I do well keeping our spending down, not perfect but overall we have avoided a lot of lifestyle creep over the years.  We are very conscious about how we spend.  Still, she likes to spend more than me.  Nothing crazy, but a modest amount more.  We kind of hit a plateau with decreasing our spending a few years back, until we discussed paying off the mortgage.  It did not make a ton of financial sense to pay off a 2.75% loan but suddenly I saw our expenses decrease by like $300 a month and I saw my spouse taking on extra work within her solo business that led to maybe $500 more income a month.  My point is that it was so motivating to her to pay off the mortgage that it actually ended up making some real changes.  I don't know if that would be the case with the student loan payoff, but I know it drives her crazy to have debt too and I would be interested to see how we as a household would react to paying it off early. 

Thanks again for your thoughts.  I do appreciate it.

[FINate]

That all makes sense.

If the student loan is driving you crazy just pay it off. From what I can infer it's not that much relative to your NW. I paid off my house >10 years ago even though I knew it was financially more optimal to keep the mortgage. One less monthly bill, and can live on very little income which means things like a pandemic and wacky stock market have almost zero effect on us. So I get it :)

[cool7hand]

There's nothing wrong with paying off the student loan. Even if it's not the most efficient thing you can do on paper, how to harness the inner power of your own psychology is a question best answered by you. If it feels right, do it!

Congratulations on having the flexibility to take such powerful actions contrary to conventional consumerism!!

[yachi]

For the portion of the cash you are considering putting into equities, here is an option trade that provides 4% returns while waiting for a 25% drop in the S&P 500:

Put the money into a trading account, leave it in cash.
Sell February 18, 2022 puts on SPY at $300 (each option is 100 shares, so you'll need multiples of $30k in the account to keep it "cash secured").  Each option pays you $1,287 for every $30,000, so you'll get about 4% on your cash to wait for a market drop.

SPY is selling for $387.92, so a drop below $300 would mark about a 25% drop in the S&P500.  At that point, the investor you sold the put to might exercise the option.  Should this happen, your broker will use the cash in your account to purchase SPY at $300 per share.

If the market never drops below $300, you will have made 4%.

[FINate]

For the portion of the cash you are considering putting into equities, here is an option trade that provides 4% returns while waiting for a 25% drop in the S&P 500:

Put the money into a trading account, leave it in cash.
Sell February 18, 2022 puts on SPY at $300 (each option is 100 shares, so you'll need multiples of $30k in the account to keep it "cash secured").  Each option pays you $1,287 for every $30,000, so you'll get about 4% on your cash to wait for a market drop.

SPY is selling for $387.92, so a drop below $300 would mark about a 25% drop in the S&P500.  At that point, the investor you sold the put to might exercise the option.  Should this happen, your broker will use the cash in your account to purchase SPY at $300 per share.

If the market never drops below $300, you will have made 4%.

But if it drops below $300 you're out $30k. Not worth the risk for a measly $1287.

[yachi]

For the portion of the cash you are considering putting into equities, here is an option trade that provides 4% returns while waiting for a 25% drop in the S&P 500:

Put the money into a trading account, leave it in cash.
Sell February 18, 2022 puts on SPY at $300 (each option is 100 shares, so you'll need multiples of $30k in the account to keep it "cash secured").  Each option pays you $1,287 for every $30,000, so you'll get about 4% on your cash to wait for a market drop.

SPY is selling for $387.92, so a drop below $300 would mark about a 25% drop in the S&P500.  At that point, the investor you sold the put to might exercise the option.  Should this happen, your broker will use the cash in your account to purchase SPY at $300 per share.

If the market never drops below $300, you will have made 4%.

But if it drops below $300 you're out $30k. Not worth the risk for a measly $1287.

$30,000 of cash leaves OPs brokerage account, replaced with 100 shares of SPY.  If OP wanted 100 shares of SPY today, it would cost him/her $38,792.

[Dicey]

I agree that your AA looks mighty conservative. To answer your specific question,  I'd hop on the bank account rewards train and ride that sucker as long as it lasts.

[FINate]

For the portion of the cash you are considering putting into equities, here is an option trade that provides 4% returns while waiting for a 25% drop in the S&P 500:

Put the money into a trading account, leave it in cash.
Sell February 18, 2022 puts on SPY at $300 (each option is 100 shares, so you'll need multiples of $30k in the account to keep it "cash secured").  Each option pays you $1,287 for every $30,000, so you'll get about 4% on your cash to wait for a market drop.

SPY is selling for $387.92, so a drop below $300 would mark about a 25% drop in the S&P500.  At that point, the investor you sold the put to might exercise the option.  Should this happen, your broker will use the cash in your account to purchase SPY at $300 per share.

If the market never drops below $300, you will have made 4%.

But if it drops below $300 you're out $30k. Not worth the risk for a measly $1287.

$30,000 of cash leaves OPs brokerage account, replaced with 100 shares of SPY.  If OP wanted 100 shares of SPY today, it would cost him/her $38,792.

I don't understand. In plain numbers what's the potential downside compared to just buying SPY?

[yachi]

For the portion of the cash you are considering putting into equities, here is an option trade that provides 4% returns while waiting for a 25% drop in the S&P 500:

Put the money into a trading account, leave it in cash.
Sell February 18, 2022 puts on SPY at $300 (each option is 100 shares, so you'll need multiples of $30k in the account to keep it "cash secured").  Each option pays you $1,287 for every $30,000, so you'll get about 4% on your cash to wait for a market drop.

SPY is selling for $387.92, so a drop below $300 would mark about a 25% drop in the S&P500.  At that point, the investor you sold the put to might exercise the option.  Should this happen, your broker will use the cash in your account to purchase SPY at $300 per share.

If the market never drops below $300, you will have made 4%.

But if it drops below $300 you're out $30k. Not worth the risk for a measly $1287.

$30,000 of cash leaves OPs brokerage account, replaced with 100 shares of SPY.  If OP wanted 100 shares of SPY today, it would cost him/her $38,792.

I don't understand. In plain numbers what's the potential downside compared to just buying SPY?

Here are the downsides:
1.  SPY increases more than 4% for the duration of the period. --  You got $1287- less than the return if you had bought SPY, and no dividends.  At the end of the period, you're still in cash.  You could have made more gains in SPY.

2.  SPY drops below $288 -- You would have been better off holding cash at 0% interest and waiting to purchase.

Here's what an account might look like with a decreasing SPY price - This was a neat exercise, showing it beats being in SPY during a crash, but isn't all roses compared to holding cash:

Option Method                                                                            Buy Now
3/1/2021
SPY Value: 387.92
Deposit Cash: +$30,000                                                             Deposit Cash: +$30,000
Sell Option: +$1,287                                                                  Buy Stock: -$30,000
Cash: $31,287                                                                           Cash: 0
Option: -1,287                                                                           SPY: 77.336 shares at $387.92  $30,000
Balance: $30,000                                                                       Balance: $30,000

6/1/2021
SPY Value: 300       
                                                                                                Dividend: 0.288 shares added
Cash: $31,287                                                                           Cash: 0
Option: -2,758                                                                           SPY: 77.624 shares at $300.00  $23,287.22
Balance: $28,529                                                                       Balance: $23,287.22

12/1/2021
SPY Value: 250
                                                                                                Dividend: 0.289 shares added
Cash: $31,287                                                                           Cash: 0
Option: -5,192                                                                           SPY: 77.913 shares at $250.00  $19,478.25
Balance: $26,095                                                                       Balance: $19,478.25

2/18/2022
SPY Value: 240
Option was exercised                                                                 Dividend: 0.289 shares added
Buy SPY: 100ea at $300, $30,000
Cash: $1,287                                                                            Cash: 0
SPY: 100 shares at $240.00 $24,000                                           SPY: 78.203 shares at $240.00  $18,768.77
Option: $0                                                                                Balance: $18,768.77
Balance: $25,287                                                                     


A few things to note:
You can buy back the option at the prices shown on each date to stop the bleeding.
You might be better off selling a series of short term puts (say 12 a month out each).
You'll notice the cost of buying back your option changes.  The drop in SPY is causing this cost to increase, while the reduction in the duration causes it to decrease.

[Coleman50000]

For the portion of the cash you are considering putting into equities, here is an option trade that provides 4% returns while waiting for a 25% drop in the S&P 500:

Put the money into a trading account, leave it in cash.
Sell February 18, 2022 puts on SPY at $300 (each option is 100 shares, so you'll need multiples of $30k in the account to keep it "cash secured").  Each option pays you $1,287 for every $30,000, so you'll get about 4% on your cash to wait for a market drop.

SPY is selling for $387.92, so a drop below $300 would mark about a 25% drop in the S&P500.  At that point, the investor you sold the put to might exercise the option.  Should this happen, your broker will use the cash in your account to purchase SPY at $300 per share.

If the market never drops below $300, you will have made 4%.

But if it drops below $300 you're out $30k. Not worth the risk for a measly $1287.

$30,000 of cash leaves OPs brokerage account, replaced with 100 shares of SPY.  If OP wanted 100 shares of SPY today, it would cost him/her $38,792.

I don't understand. In plain numbers what's the potential downside compared to just buying SPY?

Here are the downsides:
1.  SPY increases more than 4% for the duration of the period. --  You got $1287- less than the return if you had bought SPY, and no dividends.  At the end of the period, you're still in cash.  You could have made more gains in SPY.

2.  SPY drops below $288 -- You would have been better off holding cash at 0% interest and waiting to purchase.

Here's what an account might look like with a decreasing SPY price - This was a neat exercise, showing it beats being in SPY during a crash, but isn't all roses compared to holding cash:

Option Method                                                                            Buy Now
3/1/2021
SPY Value: 387.92
Deposit Cash: +$30,000                                                             Deposit Cash: +$30,000
Sell Option: +$1,287                                                                  Buy Stock: -$30,000
Cash: $31,287                                                                           Cash: 0
Option: -1,287                                                                           SPY: 77.336 shares at $387.92  $30,000
Balance: $30,000                                                                       Balance: $30,000

6/1/2021
SPY Value: 300       
                                                                                                Dividend: 0.288 shares added
Cash: $31,287                                                                           Cash: 0
Option: -2,758                                                                           SPY: 77.624 shares at $300.00  $23,287.22
Balance: $28,529                                                                       Balance: $23,287.22

12/1/2021
SPY Value: 250
                                                                                                Dividend: 0.289 shares added
Cash: $31,287                                                                           Cash: 0
Option: -5,192                                                                           SPY: 77.913 shares at $250.00  $19,478.25
Balance: $26,095                                                                       Balance: $19,478.25

2/18/2022
SPY Value: 240
Option was exercised                                                                 Dividend: 0.289 shares added
Buy SPY: 100ea at $300, $30,000
Cash: $1,287                                                                            Cash: 0
SPY: 100 shares at $240.00 $24,000                                           SPY: 78.203 shares at $240.00  $18,768.77
Option: $0                                                                                Balance: $18,768.77
Balance: $25,287                                                                     


A few things to note:
You can buy back the option at the prices shown on each date to stop the bleeding.
You might be better off selling a series of short term puts (say 12 a month out each).
You'll notice the cost of buying back your option changes.  The drop in SPY is causing this cost to increase, while the reduction in the duration causes it to decrease.

#1 is the big risk.  You're selling upside potential for minimal protection on the downside.  If that's your approach to investing, then I'd say you should just adjust your AA and call it a day.  If the stock market goes up 30% one year and then comes back down to where it started you're behind (because you only made 4% in year one and you're down about 19% in year 2 [30/130=23%, then adding back 4% of premium equals 19%]). 

In 7 of the past 10 years of SPY you'd lose out significantly doing this strategy.  Take last year, for example.  In 2020 SPY was up 18.40%, but you'd be stuck at 4%.  If 2021 is down 20% you'd still be down 16%.  This really matters over time!

[chasing_FI]

Thanks everyone for the comments and thoughts.

-So I really did talk all the replies about asset allocation to heart, so I did take the time to calculate mine to make sure I was not lying to myself.  It does turn out I have gotten a little more conservative than I had planned.  So, thanks again for those who brought that issue up.  Turns out I had drifted to 53% stocks and 47% bonds-cash.  Thanks everyone.  That was my intention of posting, to get people to tell me where I was wrong so I really appreciate it.  I immediately threw some of that cash into VTSAX, the order should have gone through at the close of markets today.  I couldn't stomach making an all in one buy upfront, so I will also adjust my monthly ACH upward.  I will check my asset allocation again in April, after annual bonus gets paid out.

-As for options, I have sold some covered calls in the past.  Mostly to try something new and learn.  Though, I do not have any plans to do that in the future again.  I own no individual stocks and have no options trades any more and I like life this way.  Just less noise for me to pay attention to.

[chasing_FI]

I forgot to mention one thing.  I typically count the student loan debt as a negative bond.  Let me know if you think I am nuts for viewing it that way.  So, because of that if I pay off the student loan quicker I will actually be tilting my asset allocation more toward bonds.  Thus, I will actually hold off on making any extra student loan payments.

Thanks again for people pointing out my errors.  Feel free to offer more thoughts.

[Coleman50000]

I forgot to mention one thing.  I typically count the student loan debt as a negative bond.  Let me know if you think I am nuts for viewing it that way.  So, because of that if I pay off the student loan quicker I will actually be tilting my asset allocation more toward bonds.  Thus, I will actually hold off on making any extra student loan payments.

Thanks again for people pointing out my errors.  Feel free to offer more thoughts.

It's very interesting that you count debt as a negative bond.  Nothing particularly wrong with that, but you're just drawing the line in a different spot than most.  Taking that thinking a step further - you could see all your recurring expenses similarly.  For example, you could view rent as an interest only mortgage with no maturity date.  At the institutional investing level they call that liability matching/cash flow matching/immunizing your portfolio.  It works best if you're actually getting a better rate on your bonds than you're borrowing at, and it is usually done with actual bonds, but the concept is the same.

[chasing_FI]

Cool.  Keep the feedback coming, I really appreciate it.  Seems the more advice I get, the more it shows I need to shift more toward stocks.  So, I bought another $10,000 of VTSAX today.  Thank you for your thoughts.

[yachi]

In the vein of "how do you view your debt, and bonds":  When we started out, SO and I had a lot of debt - mostly student loans, but still debt.  Trying to determine what our asset allocation should be, bonds didn't make sense relative to our debt.  My thinking was "why should I invest in bonds returning 4% when I can pay more on a student loan at 6.5%?"  I thought of paying off more on loans as contributing to the bond portion of our AA.  I stopped short of formalizing it though. 

[Dicey]

In the vein of "how do you view your debt, and bonds":  When we started out, SO and I had a lot of debt - mostly student loans, but still debt.  Trying to determine what our asset allocation should be, bonds didn't make sense relative to our debt.  My thinking was "why should I invest in bonds returning 4% when I can pay more on a student loan at 6.5%?"  I thought of paying off more on loans as contributing to the bond portion of our AA.  I stopped short of formalizing it though.

Good for you! I never really understood the appeal of bonds, especially if you are young and have a long investment horizon. It only occurred to me much later that my house, with its long, low interest mortgage was already a big-ass bond. Though I suspect this concept is harder to process than "Kill all the debt."  or "All debt is bad."

Don't get me wrong, I know bonds provide a higher measure of safety and stability than equities. I just think for someone who gleans a reasonable financial education, large amounts of "Bonds" are not really necessary and come at a very high cost. Ergo, as I age, I am resisting the trope to increase my bond holdings accordingly. I'll let you know how that works out in a couple of decades or so...