We're talking about larger amounts of cash typically held in what we would call "cash reserves". For those still working, your cash reserves account should hold about 4-12 months of expenses. For those retired, 3-5 years of expenses. Let us know if you have questions. This article is not addressing the strategy behind cash reserves.
Since the "retired" or "financially independent" have a consistently larger balance in cash reserves, then it makes most sense for them to go to a little extra trouble to get a better yield. It does add up over time! The approaches I am suggesting will automatically adjust to a higher yield as interest rates inevitably rise in future.
Keep in mind that your cash reserves strategy is a portion of your overall financial strategy. The written strategy should focus on maximizing the probability of achieving your written financial goals. As simple as cash reserves sound - there is strategy behind it and it plays an important role, but differing roles depending on where you are in life.
Suggestion #1 - CD Ladder
This is primarily for the financially independent who should have 3-5 years of expenses in cash equivalents so that their main portfolio is protected during a downturn. If there are other steady reliable streams of income available (i.e. pensions, rental income, social security) then those are subtracted.
You split up your 4 year expense amount into 5 equal pieces. The first four pieces are used to purchase CD's with 4, 3, 2 and 1 year maturiies. The last 1/5 is divided into 4. 9 6 and 3 month CD are purchased and the last bit us left in cash. As CD's mature annually, a new 4 year CD is purchased. As the monthly CD's mature each quarter, a new 9 mo CD is purchased. When the ladder is mature you have all 4 year CD's, one maturing each year and 9 mo CD's one maturing each quarter. Such a mature ladder would currently earn from 1.5% to 2%. A brand new 4-year ladder currently yields around 1% maybe a bit better.
We do this for our clients. We have access to banks nationally. Plus we can purchase CD's on the secondary market which yield higher than primary issues. All of this is completely safe --
FDIC insured. This is easy for us to do and low risk, so we charge a very low fee. For clients with enough assets under management we may do it at no cost.
It's uper convenient. We are available to transfer money in either direction - between cash reserves and your main checking account with your verbal request. These transfers can also be made automatic, "x" amount/month
Our clients are spoiled with the highest rates you can get and concierge transfer service!Suggestion #2 - On-line BanksYou need a little internet savvy for this option, but not much. Most commonly known service is the "Orange Account" available through INGDirect. Just google: "orange INGDirect". Last I saw, you can get 1% there. I think HSBC Direct also has such an account. Don't let the on-line nature worry you -- it's all
FDIC-insured money.
This is good for many because it's less complicated than a CD Ladder and easier for "do-it-yourselfers". You don't have to worry about a sudden need that would case you to break in to a CD before it matures and forfeit the interest. You manage the account and the transfers to/from.
These accounts may have minimums and make sure that you can easily electronically transfer between this account and your main checking account (and at no cost).
