Cash Management – Where Is The Best Place To Keep A Large Amount Of Cash?

On many occasions, I have seen people with a large amount of their assets in cash. Sometimes, the cash is from selling a house or other asset. Other times, it has just accumulated over time.

The decision of what portion of your assets to keep in cash is an important one. However, if you, for one reason or another, decide to keep a large amount in cash, the next question is: where is the best place to keep it?

What not to do – keep cash in checking/savings

Many people just keep their cash in the place that is most convenient for them – a checking or savings account. Most checking accounts and a lot of savings accounts pay almost no interest. This is not a huge deal for small account balances, but it is meaningful for larger account balances.

Some savings accounts pay 0.01%/year in interest. However, let’s assume you find one paying 0.50%/year. This is meaningfully less than the 3.90%/year you can get in treasury bills – treasury bill interest is also exempt from state tax. Here is a chart showing the amount of additional interest that can be earned by switching to treasury bills:

So, for someone with $250,000, they can earn an additional $8,500/year in interest by switching from a low interest account to treasury bills. This is $708/month!

Different options for cash

Here are some different options for your cash:

• Checking Account. Most flexible, but low/no interest.

• Savings Account. Still very flexible, but can pay very little in interest, depending on the bank.

• High-yield Savings Account. Typically offered by online banks. They can pay better interest rates and can be a good option.

• CDs. Can offer higher rates, but you are committing your money for a specific period of time.

• Money Market Funds. Mutual funds that hold short-term bonds or other similar securities. There are some management fees. If the fund holds treasury bonds, the interest is state tax exempt. Money market funds are not insured the same way bank accounts are, however, funds holding treasury securities are very safe, as the underlying securities are backed by the United States government. Money market funds can be a good option, particularly for medium-sized cash balances.

• T-Bills. T-bills or treasury bills are short-term government bonds. Interest is typically higher than bank accounts. Interest is also state tax exempt. By purchasing the bonds directly, you avoid paying the management fee on a money market fund, however there are some small fees to buy and sell, such as the bid/ask spread (which we won’t go into here). I wouldn’t recommend buying the securities in a treasury direct account, as you can’t sell them directly if you need the funds urgently – you would have to transfer them to a broker and sell. Like money market funds, T-bills are not insured the same way bank accounts are – however, treasury securities are very safe, as they are backed by the United States government. Buying T-bills is often the preferred option for larger cash balances.

Example – CDs to T-Bills

As shown above, the most dramatic differences can be seen when going from a low interest checking/savings account to T-bills.

However, there can still be worthwhile benefits when going from some of the other options to T-bills. For example, if you have $400,000 in CDs earning 3.50%/year, you can get an additional $2,405 in interest and state tax savings (assuming a 5.75% state tax rate) by moving to T-bills:

T-Bills also don’t have an early withdrawal penalty. There can be transactions fees and spreads for selling the bonds, but these would normally be much less than early redemption fees on CDs.

Example – High-yield savings account to T-Bills

Another example would be going from a high-yield savings account with a 3.50% yield to T-bills at 3.90%. On $150,000, there would be $902 of yearly benefit (assuming a 5.75% state tax rate):

This is nice benefit for giving up a little flexibility.

How does this relate to your situation?

Ulmer Financial helps clients with cash management – we help clients buy money market funds or T-bills.

If you are interested in discussing this, feel free to schedule a meeting or contact me via email (crawford@ulmerfinancial.com).

In addition to helping clients with their investments, we also prepare clients’ tax returns. Our goals is to bring together clients’ finances, so they don’t have to deal with multiple advisors.