Where to Park Your Short Term Cash

[arebelspy]

This question comes up all the time here.  Where do I keep my huge chunk of cash that I will need relatively soon?

There are lots of different opinions, but here's a great article that articulates the reasons behind one of the best places, IMO: short term T-bills.

http://www.joshuakennon.com/treasurydirect-cash-reserves/

[matchewed]

But what if I need it to grow fast in that short term? ;)

[TheDude]

I am not really behind T bills the lack of return isnt worth it. You should have a plan. It doesnt matter if you have $300 or $1000000 you should excute your plan. I recommend a nice balanced portfolio of low fee vanguard funds. Should come into a large amount of money you should have trust in your in your portfolio and execute appropriately. Also if you have faith in the Treasury than there is no reason to not have faith in the FDIC. Meaning you can up to 250K  in the bank (500K Joint)

[Another Reader]

+1 for Joshua Kennon and for my father, who believed and did exactly the same thing. 

I don't think most people understand how close the banking system came to failing in October 2008.  I actually went to Wells Fargo and withdrew several thousand in cash and drove it to the bank of the contractor to whom I owed payment on one of those dark October days in case the inter-bank transfer system (ACH) shut down because of a major bank failure.  My parents were children of the depression and they had vivid memories of people not being able to withdraw money from the bank to pay the mortgage or buy food.   For them, cash beyond the FDIC insurance limits was in US treasuries and NEVER held at a bank.

All you folks that think your credit cards or your HELOC are your emergency funds would be well-served to read the article and consider whether your current assumptions are correct and if your contingency plan is really a plan.

[arebelspy]

You should have a plan. It doesnt matter if you have $300 or $1000000 you should excute your plan.

Of course.  And often that plan involves short term cash.

In which case, the article applies.

;)

[Kriegsspiel]

Hah, what a coincidence, I have Joshua's site open in my other tab, been reading it a lot today.  I hadn't seen that particular post, but I've been using t-bills as cash for a while now through Vanguard.

[Another Reader]

Are you buying T-bills registered in Vanguard's name or a treasury money market fund (VUSXX)?  That is NOT the same as registering with Treasury Direct and buying the bills and notes in your name. 

[grantmeaname]

I don't get it. You can have up to $250,000 in an insured, safe-as-cash demand deposit that you can withdraw at any time via check, ACH, or debit card, earning .76% or .95%, but you'd rather inconvenience yourself and give up liquidity and earnings potential in order to feel better if the entire FDIC fails and not have to wait the three or four days it takes to get your funds from the FDIC?

[Another Reader]

As the article states, amounts OVER the FDIC limits. 

I think you could be waiting a lot longer than 3 to 4 days in the event the FDIC had to cover the failure of a Citibank.  Which they alnost had to do in 2008.  T-bills, registered in your name, backed by the full faith and credit of the US government.  No FDIC intermediary.  Works for me.

[grantmeaname]

That's not what it says:

You never keep your entire net worth in a bank, especially if you have a balance in excess of the insurance limits in place by the sovereign government backing your claim on the financial institution.

Most of you are United States citizens.  If you suddenly found yourself on a very large pile of money – maybe you sold a business, maybe you won the lottery, maybe you inherited a fortune from a long-lost relative – there is only one place in the entire world the cash should be parked, presuming the United States is still the wealthiest and most stable country on the planet: Directly with the United States Treasury, in short-term T-Bills.

He's also missing the fact that the $250,000 is per depositor, per institution. You come in to $500,000? Send it to two bank accounts at two banks.

[Another Reader]

"Spare cash, until used, is stuck in T-Bills.  That’s the rule.  It’s a simple one for those of you who exceed the FDIC limits."
 
"If any of you are out there and have your entire life savings sitting in an account far in excess of the FDIC insurance limits, I am pleading with you to please consider the safer Treasury direct registration."

You have never experienced a bank run and you probably don't know anyone that has.  The FDIC is fine for the occasional community or even a regional bank failure.  In a major collapse, your deposits will be negotiated away and the insured portion will take a long time to recover.  Just ask those Cypriots how they are going to pay their bills with that daily withdrawal limit.

[grantmeaname]

You have never experienced a bank run and you probably don't know anyone that has.  The FDIC is fine for the occasional community or even a regional bank failure.

You'd have to be four years old to never have experienced a US bank run (thanks wikipedia).

In a major collapse, your deposits will be negotiated away

Causing the first loss of a depositor's principal in the United States since 1933's establishment of the FDIC? I'll take my chances.

and the insured portion will take a long time to recover.

 
Based on hearsay, or numbers you just pulled out of your ass?

Just ask those Cypriots how they are going to pay their bills with that daily withdrawal limit.

That 300 euros is the cash withdrawal limit, so it's not like that's your spending limit unless you pay all your expenses in cash. It's also the first time capital controls have been seen in a Eurozone nation, and if I remember correctly the first time in the first world. Even setting that all aside, the point of capital controls like cash withdrawal limits is to prevent capital flight out of the country, not to deal with deposit failure.  You may note that they're on the Euro and so the value of the currency or ability to get foreign exchange is not the issue; you'd be correct, but the Cyprus economy largely functions as a custodian of foreign assets due to low corporate tax rates and a laissez-faire regulatory attitude -- enough so that the banking assets held in Cyprus are five times the GDP. Clearly capital flight is an issue, then.

Not only are you making an apples-to-oranges comparison, you're making an apples-to-oranges comparison that could not even apply to the United States!

[Another Reader]

How much did you lose in the WaMu or Wachovia failures?  Did you pull money out of IndyMac before the takeover?  Ask someone that has been through this how they feel about bank security.  Better yet, find someone that lived through the bank runs here back at the beginning of the depression.

Take your chances, that's your choice.  I prefer real security over mind-numbing platitudes.

[Kriegsspiel]

Another way that I think about it is that, if you want that extra bit of yield that makes the difference between a treasury and a bank's CD, why not just change your AA?  I think Larry Swedroe has the same outlook from what I've seen on the Bogleheads forum, IE, why take ANY risks with bonds, when you can just allocate more money to stocks for a better rewarded risk. 

[Another Reader]

+1.  Equities and treasuries are the paper assets that I prefer.  Bonds are far more risky than they appear and I do not think I am adequately compensated for taking that risk in the retail market.  I would rather be in the equity ownership position. 

[TheDude]

When Wamu failed people barely noticed. It closed at normal time on Friday and opened at a normal time on Monday. It may have not been a Citi or BOA but at the time it was the sixth largest bank. FDIC is a cornerstone of the US financial system. I don't believe the US government is any less like to pay out FDIC than it is to make good on T bills. If the government isn't full filling deposit insurance its probably not paying T bills either. They are both absolutely critical to our economy.

If you have happen to have a 100billion that you need ultra safe T bills work wonderful. That qualifies what maybe 10 companies/sovereign wealth funds? If have 2mil you need to cover get yourself several different bank accounts.

[secondcor521]

How much did you lose in the WaMu or Wachovia failures?  Did you pull money out of IndyMac before the takeover?  Ask someone that has been through this how they feel about bank security.  Better yet, find someone that lived through the bank runs here back at the beginning of the depression.

Take your chances, that's your choice.  I prefer real security over mind-numbing platitudes.

I had more than $250K at IndyMac when it went into FDIC receivership (or whatever the right phrase is).  It was all insured thanks to the way I structured the accounts.  My money was all there the next day, I didnīt lose a penny, and it was really no big deal at all.  Iīm with grantmeaname on this one...I feel totally fine about bank security.

Seems silly though...who on earth needs to keep that much money in liquid assets for more than a few days?

[arebelspy]

Seems silly though...who on earth needs to keep that much money in liquid assets for more than a few days?

Those with an AA that specifies it as such, or those that have it specifically for an opportunity.  See: dry powder.

[grantmeaname]

And untold millions of wealth? As in, nobody here?

[Another Reader]

Untold millions not required.  Just more cash than the FDIC limit and some concern about safety and liquidity.  Lots of folks with more than a pocket fill of change hang out here.   

Buy and sell real estate?  This might apply to you.  Especially if you need that dry powder for the next deal.

[grantmeaname]

Since most people here are retiring on around a million NW, more than the FDIC limit for a mere two banks would mean having more than half their final portfolio in cash as 'dry powder' at any one moment. And the difference between 1% and .1% on that half a million is nearly $400 a month. Is that really worth it for whatever still-unarticulated benefits avoiding demand deposits brings you?

[Another Reader]

The benefits of liquidity and safety were very well articulated.   You pay a price for those features, as clearly stated in the article.  And many here have or intend to have NW of $3MM or more.  Having cash of $250k or more would not be uncommon in that NW range, especially for business people and investors.

I don't "avoid" FDIC insured deposits.  I just don't leave large sums of cash uninsured and at risk and no prudent person should in my view.

[grantmeaname]

Did anyone in this thread advocate ever doing so?

[Another Reader]

Mr. Kennon was attempting to educate folks that don't understand the limits of the FDIC, have never personally experienced a bank run, and might be unaware of the availability and benefits of the Treasury alternative.  It's likely that some participants in this forum were educated by the article.  Others that know everything already likely learned nothing.

[smedleyb]

What's a billionaire to do with excess cash in these uncertain times?:

"What more do you need to know? Please, you better hurry, you better run for the hills. I'm doing it anyway," Rogers said. "I want to make sure that I don't get trapped. Think of all the poor souls that just thought they had a simple bank account. Now they find out that they are making a 'contribution to the stability of Cyprus. The gall of these politicians."
"If you're going to listen to government, you're going to go bankrupt very quickly," he added.
"I, for one, am making sure I don't have too much money in any one specific bank account anywhere in the world, because now there is a precedent," he said. "The IMF has said 'sure, loot the bank accounts' the EU has said 'loot the bank accounts' so you can be sure that other countries when problems come, are going to say, 'well, it's condoned by the EU, it's condoned by the IMF, so let's do it too.'"

http://finance.yahoo.com/news/jim-rogers-run-hills-im-155520607.html

Oh, the stress of where to stash my millions!  What kind of rates do hills offer on cash, anyways? 

[Kriegsspiel]

What do you mean by risk free?

[brewer12345]

I don't have enough cash to worry about this sort of thing.  If the global financial system goes tits up, I suspect I will be a lot more concerned with my ammo supply than where my cash is on deposit.  Happily, systemic implosion does not appear to be in the offing and in any case I cannot do anything about it.

That said, nobody should have uninsured deposits at any US bank.  Its a foolish, unnecessary risk.  You can either spread cash around to different banks, use a program like CDARS, or go buy full faith and credit instruments issued by the US gubmint.  I use Treasury direct for I bonds (since it is the only way to buy them), but it is quite frankly a pain in the ass.  If I wanted to own a pile of T bills, I would buy them through my brokerage account.

[CDP45]

If you have more than $250,000 in cash, and you don't know what to do with it, all I can say is an idiot and his money are quickly separated.

[secondcor521]

I understand the dry powder argument in general, but for those in that kind of situation, two sincere questions:

1.  What is the difference (in days) between the amount of time it takes to convert a Treasury investment into something that can be used -- in a real estate purchase, letīs say -- versus the amount of time it takes to convert, say, a money market investment at a brokerage firm?  I think, but donīt know, that it would be negligible...maybe I can convert a Treasury into a cashierīs check at a closing table in maybe 3 days, versus maybe 4 or 5 days for a MM.

2.  How often do good deals come up in which closing or acting that fast is necessary for the deal to be made?  I would think it would be rare, but again I donīt know for sure because I donīt play in those areas myself.

And in general, again, even if I had a NW of $3MM and was worried about FDIC insurance, itīs really not that big of a deal to have, say, $200K at bank A and $200K at bank B.

I donīt really have a dog in this fight, but I guess I enjoy discussing the details of stuff like this.  But I will add that Mr. Kennon seems like a reasonably smart guy but he still messes up details that makes me think heīs not as smart as he thinks he is.  For example, it is not Article XIV of the Constitution from which he is quoting; it is the Fourteenth Amendment.  Two different things.  There are in fact only seven Articles of the Constitution, something that a quick Wiki check can clear up.  Yes, I understood what he meant, but imprecise wording in technical areas that I know about make me think that maybe he's imprecise in other areas.

[smedleyb]

If you have more than $250,000 in cash, and you don't know what to do with it, all I can say is an idiot and his money are quickly separated.

Exactly.  I have mine spread under several mattresses. 

[jnik]

It's also the first time capital controls have been seen in a Eurozone nation, and if I remember correctly the first time in the first world.

Iceland is still under "temporary" capital controls, 4+ years later (see any Economist article on the Cyprus bailout.)

[grantmeaname]

Fine, but Iceland's not on the Euro and I said "if I remember correctly". I didn't. Regardless, that doesn't change any of the arguments substantially.

[Mr Mark]

So, how many people out there have a need to stash more than half a million of cash?  Sounds like more from the 'the sky is falling government conspiracy black helicopter buy gold ' contingent! Lmao.

[Mr Mark]

This question comes up all the time here.  Where do I keep my huge chunk of cash that I will need relatively soon?

There are lots of different opinions, but here's a great article that articulates the reasons behind one of the best places, IMO: short term T-bills.

http://www.joshuakennon.com/treasurydirect-cash-reserves/

Almost forgot the OP...

In UK and NZ, people would sometimes put super short term money - house escrow say - into these Government saving bonds that pay interest via a lottery system, and hey, you could hit something big. Can't remember what they were called.... EARNIE in UK....?

Like the idea of two banks, some cash on hand in a safe deposit box. But no-one should have super large cash anytime. If you are worried about deposit insurance and sums over half a mill, this is not your forum. That's a 2 million portfolio at minimum.

  But t bills seems a hassle. 1% of NW or 3 months expenses should be enough cash for anyone, so for more cash than that, and for longer term, banks seem best if you can't take any capital loss.

[Mr Mark]

This question comes up all the time here.  Where do I keep my huge chunk of cash that I will need relatively soon?

There are lots of different opinions, but here's a great article that articulates the reasons behind one of the best places, IMO: short term T-bills.

http://www.joshuakennon.com/treasurydirect-cash-reserves/

Well, definitely not in gold or precious metals! We know that much!

[vwDavid]

Interesting article. Thanks for the education. Can anyone articulate the canadian angle. I thought our bank deposits were insured to $60k only? I need to re-educate.

[grantmeaname]

Start here. Looks like the insurance limit is $100k on savings and checking accounts.

[vwDavid]

Thanks Grant. I started reading that yesterday.

Despite my financial knowledge, I have one silly questions from the canadian perspective:

1) investments in equities and the like would not disappear during a bank default because I "own the company" right? The Bank is the intermediary so they would have to transfer my stock ownership to another brokerage? (or does the bank own the stock on my behalf and my investment equities could disappear on a bank default?)

[Mr Mark]

Good question. That's why I like vanguard. At total funds of $2 trillion, even if they are a bit bent, we should be ok!

But be careful with some smaller funds, where you may be only an indirect owner, and vulnerable to fraud. Or just poor results despite the supposed benchmark. A fund can also direct income to an affiliate via a lot of churn. The affiliate syphons off via trading fees.

And we've all heard of the "Uncle " who invests money for people/the family/ etc. Beware! 

[vwDavid]

I wanted to bring back this where to park your short term cash question- Canadian perspective.

What is the equivalent of direct treasury bills in Canada? There are Canadian T-bills, canada savings bonds, and ETFs with provincial and gov't back bonds and promissory notes.

For someone needing to park some cash for 6-24 months, yeild is not a huge concern, capital protection and liquidity is the higher concern, what should a canadian do?

Go to bank and buy laddered Can Tbills
Go to bank and buy laddered GICs?
Go to bank and buy ETF with Gov'ts debt?

thanks for advice.

[aj_yooper]

My father-in-law kept a strong box of "deal cash" and owned real estate outright.

[vwDavid]

Got enough real estate thanks.

Need advice/alternative ideas for Canadian govt backed or guaranteed investments...

Strong box is only as strong as your home.

My uncle had his 350 lbs safe removed from his home by 4 guys...

[johnjm22]

The FDIC is fine for the occasional community or even a regional bank failure.  In a major collapse, your deposits will be negotiated away and the insured portion will take a long time to recover.  Just ask those Cypriots how they are going to pay their bills with that daily withdrawal limit.

The FDIC is funded by the selling of Treasuries.   

A systemic banking collapse of the magnitude you're speaking of could only happen if the Treasury market collapsed.  When the Cypress/Icelantic banking systems went under, so did the governments bond markets.

[Stache In Training]

I'm going to have to agree with Grant on this one. 

What's wrong with just staying under the FDIC limit?  I have 2 local credit unions, and an online bank, all FDIC insured.  Which means, if I ever needed a buttload of cash stored in liquid cash form, between me and my wife (since both of us are on the accounts) we could store 500K (250K per depositor) at each one.  So a total of 1.5 million dollars insured.  If that's not good enough to live off of indefinitely, then I'm missing something.  If I for some reason need to have more than 1.5 million dollars in cash, I'll just ride my bike down the street to another local bank, and open an account: BAM, another 500K insured.

All of these examples in the articles were for huge companies, with huge bankrolls.  Yeah, If I have the $100 billion that Apple had, yes I'd use this (because I can't just open 100 bank accounts); but since me personally having $100 billion is never going to happen, I see no reason not to just stay under the FDIC insured limit.