I don’t know about you, but I remember the days when you could earn some interest on your cash. This is definitely not the case in today’s
low no interest rate environment.
Back in the 90’s and early 00’s we had a cash account with a brokerage where we parked our emergency cash fund. Our balance back then was about $35k and we would happily earn about $75 a month in interest. It wasn’t crazy money but it was better than a bank savings account and was still liquid should an emergency arise. We at least felt like the money wasn’t getting killed by inflation while it was protecting us from unforeseen events.
Fast forward to today’s environment and it feels like there are zero options for people who just want to keep some cash on hand in case of an emergency or an unexpected expense. Which really sucks because I love having cash and after selling our house we walked away with a lot of it.
For the past few weeks I have been struggling with what to do with this new found cash hoard. I would love to just throw it all into VTSAX or another one of our core holdings and forget about it. But this cash is an important component of our transition. It will eventually be part of the money we live off of for a few years while we bridge the gap until the day we can access other funds without penalty. It will be especially important to us if Mrs. RVF stops working should her six month agreement with her company come up for review and they both decide to part ways.
After some thought I decided to split the baby as the saying goes and move $125k, which is the portion we hope to not use in the immediate future, into one of our core holdings. This is a fund we have held for over a decade and it already pays us a healthy dividend each quarter. I was comfortable adding to it so we can keep reinvesting the distributions until we need the cash. This will also allow the money to grow while we don’t need it and generate some low tax income once we flip the switch and start using the distributions for living money. The downside is this is not a very tax efficient strategy while Mrs. RVF is still working but that’s the price we have to pay at the moment.
After we made that move I felt pretty good about our decision but we still have a large amount still sitting in cash earning a whopping 0.01% interest each and every month. Think about that for a minute, if you have $100k in a savings or money market account you are earning less than $1 a month! That money is earning 99% less interest on 285% more cash than we were 20 years ago. This paltry rate doesn’t even cover the fees on a low cost Vanguard Money Market Fund which are about 0.16%. You are essentially paying them to hold your money for you. Makes you wonder how fixed income people are even surviving these days.
So now what the heck do we do with our cash? This is money that might be needed in an emergency or for a large unexpected expense, such as our RV needing repairs, so it needs to be somewhat accessible. I keep digging and looking for options but I’m kind of stuck. Every option seems to either be not worth with the time to set up or too risky for money that might be needed quickly.
Again, Money Markets are at 0.01%. High yield savings accounts are an option, but I don’t really feel like opening another account for 0.50% interest. Bank certificate of deposits (CD) are worthless and are worse than both of the first two because they pay the same garbage low interest rate and also lock up your cash for a specified period of time. I looked at tax free muni funds and there are not very many options and most of them stink.
I’m at a loss on this both figuratively and literally as our cash sits idle and it feels like it’s value is eroding by the day. Maybe the best and only option in a
low no interest rate environment is to just keep a minimum balance and purchase riskier assets. Dividend paying assets are always a good idea and they are a good inflation hedge too. Maybe that’s the answer?
There are ways around having a low cash balance. Should an emergency happen there is typically an option to use a credit card to pay the vendor and then you can pay the balance in full once the bill is due. This would at least cover the immediate expense and also buy time to generate some cash to pay the balance interest free. Heck you might even get some reward points on your credit card which is probably more valuable than the 0.01% interest rate your bank is paying.
One thing is for sure and as much as I hate to say it, cash is dead money.
If you have cash on hand what are you doing to keep it relatively liquid and assessable while while combating low rates and inflation? We would love to hear your about your strategy so please share your thoughts in the comments below.
Thank you for reading.