What Should You Do With Your Cash?
With the recent headlines, we are reaching out this week to take a stroll down Logic Lane to talk with our favorite neighbors about their cash and the role it serves in their personal financial lives. Who doesn’t like to strike up a conversation at the community mailbox about how much money they have and how they are handling it? The folks on Logic Lane know there is nothing like a good crisis du jour to get everyone talking about their money and we are all ears.
Today we are discussing what many consider to be the most boring asset on their personal balance sheet, cash. With the FDIC stepping in to protect deposits and the rise in interest rates being paid on cash, it is worth considering what your options are for managing and protecting your cash balances. For most of the residents on Logic Lane, cash makes up a small percentage of their overall net worth, but it plays a very important role in short term financial security or known short term financial needs. Each neighbor on Logic Lane keeps a different cash reserve based on their personal circumstances - how many income streams they have and how predictable they are, how much debt they carry, do they own disability insurance, or simply their personal risk appetite. For these neighbors, most of their assets are positioned in longer term tax efficient investment accounts to match the time horizon for when that money will be needed. Why? Because they are a logical bunch. But, while they expect volatility in their investment accounts as a tool for long term wealth accumulation, they don’t want or expect any uncertainty with the money that is needed to pay Uncle Sam next month.
Bottom line up front? No one on Logic Lane has the same situation when it comes to their cash, where they bank, how many places they bank at and why, or what features at a bank are most important. The quickest and best resource to check if your cash accounts are protected by FDIC and if any of your cash falls outside of the FDIC limits is to use this calculator. Depending on your situation and how many accounts and banks you use, this could take 2 minutes or 20 minutes to determine. And, you may quickly realize that it can take quite a bit of effort to make it all look effortless.
For many people, the FDIC limit of $250,000 per depositor for each ownership category per bank is a non-issue. If you are married, odds are you don’t carry more than $500,000 in cash in any one bank and therefore you are not particularly concerned about FDIC limits. But, for those who do carry large cash balances or are interested in learning more about how all of this works and what options exist, we encourage you to read on.
Today on Logic Lane we are going to meet six families – The Simples, The Complicateds, The Riskys, The Diligents, The Outsourcers, and The Mattresses. Each has a different circumstance and therefore, different strategies we will discuss.
Meet Sarah and Sam Simple. They do all their banking at Minimalist Bank. They have one joint checking account with $20,000 balance, one joint CD with $100,000 and one joint savings account with $200,000. Total savings at Minimalist bank is $320,000. Because all of their accounts are joint, they are each covered for $160,000. All their assets are protected by FDIC limit of $250,000 per depositor, per bank. Simple, clean, easy. Just how Minimalist Bank likes it.
Meet Chuck and Clara Complicated. Chuck and Clara are business owners and bank at three different banks. Chuck keeps his personal checking as well as his business checking and savings at Lay-Z Banking. Chuck is a Sole Proprietor and escrows his own taxes, which means, depending on the time of year, he can have a lot or a little in his business savings account. He has $30,000 in his personal checking, $80,000 in his business checking and $400,000 in his business savings account for a total of $510,000 at Lay-Z. Clara and her two siblings are the beneficiaries of a revocable trust savings account owned by her uncle at Rich Uncle Bank. This revocable trust savings account has a balance of $900,000. The last bank is Ducks in a Row Bank, which is for Clara’s business which is an S Corporation. She has a personal checking account with $20,000, personal savings of $100,000, a business checking of $50,000 and business savings of $150,000. Chuck and Clara also hold their joint personal savings at Ducks In a Row with a balance of $100,000. The total deposits at Ducks in a Row Bank come to $420,000.
I told you it was complicated. Bottom line? Their total cash is $1,230,000 across the three banks and after spending 10 minutes putting all their accounts into the FDIC calculator, we find that $920,000 is FDIC protected. As one of three beneficiaries of the trust, Carla is attributed 1/3 of the $900,000 balance for a total of $300,000. $250,000 of the $300,000 would be protected. Because Chuck is a Sole Proprietor, his accounts are all considered “his” and not a separate depositor of his business, and therefore only $250,000 of the $510,000 is protected by FDIC. In contrast, all of Carla’s accounts at Ducks In A Row are protected because some are owned by a different depositor, her S Corp. Their problem of FDIC uninsured assets is easily solved a few ways by Chuck adding Carla as a joint owner on his accounts at Lay-Z banking or by the trust opening a second savings account at Loaded Uncle Bank around the corner from Rich Uncle Bank, and transferring a portion of the $900,000 to bring each beneficiaries portion to below $250,000.
Next up is Rick and Retta Risky. Rick and Retta have a joint investment account in which they hold $750,000 in a Federal Prime Reserve Money Market Mutual Fund. While considered low risk, and a current yield of 4.38% (as of 3/14/2022), it is an investment account, not a bank account, and is not covered by FDIC. Rick and Retta can put as little or as much money as they want into this account without any regard for FDIC limits. Rick and Retta like racing sports cars, cooking eggs after their stated expiration date, and otherwise living life on the edge. They are comfortable with the slight increase in risk by moving from a FDIC High Yield Savings Account to a Money Market Mutual Fund to have the opportunity to earn a higher rate of return on their cash.
Meet Darla Diligent. Darla is a widow who keeps a cash balance of $1,500,000. Darla has set up high yield savings accounts at two different banks, each with $750,000 balances. But wait, I thought she was diligent? Why does she have 3x the limit at one bank? The accounts at each bank are titled as Payable On Death to her three adult children and therefore, because of the account structures and titling, each account has $250,000 limit for the three beneficiaries, for a total of $750,000 of FDIC coverage per bank.
Oscar and Olivia Outsourcer love cash and have been aware of the $250,000 limit for as long as they have been saving. A few years ago, once Oscar started having health issues and they no longer wanted to manage all the aspects of their financial lives themselves, they decided to consolidate their cash holdings and take advantage of the Bank Deposit Sweep Program. Oscar’s first question was “Why are they sweeping my money and can they also come and sweep my house?” While this offering doesn’t come with getting those sneaky crumbs out from under the kitchen island, it does have other, potentially more lasting, benefits. The Bank Deposit Sweep Program is available through the custodian for Azimuth Wealth Management, Inc. and through it you can open one joint account and have up to $13,000,000 FDIC protected ($6,500,000 per individual). While it shows as one account on Oscar and Olivia’s statement, in the background their money is being deposited at 26 different banks ($250,000 per person per bank), which are also reflected on their statement so they know where their money is at all times. The cost of this decision is that while today’s online FDIC high yield savings accounts are earning 3.75% (as of 3/14/2023), their Bank Deposit Sweep Account is earning 2.00% at their asset level. But, the benefit is that they don’t have to personally track 26 different savings accounts at 26 different banks, each with $500,000 total in joint accounts and then worrying when those accounts earn interest and go over the $500,000. The peace of mind and simplicity is worth the opportunity cost, but Oscar is still pushing for this magical sweep account to also take over some of his household chores.
Our last couple is Mike and Martha Mattress. They bank at their mattress and occasionally their coffee can in their backyard. They did have one savings account at the local bank and this week drove over to request a full withdrawal of $100,000. The bank notified them that they can’t just give them $100,000 in cash on the spot in $10s and $20s and that the request would take a few days to complete. Mike and Martha asked if the banker’s nickname was George Bailey and that they were going to be moving their banking to Potter down the street. The 24 year old banker stared at them blankly, didn’t get the reference and told Mike and Martha that they had a chance of being robbed if they walked out of the bank with a large amount of cash. Mike and Martha are going to wait a few days to get their money and in the meantime, Mike is researching how he can secure a personal armored vehicle and some heavy canvas bags with locks on it for their money. What you gain in a sense of control with this strategy, you lose in terms of physical financial security, FDIC protection and any protection against losing money slowly through inflation.
The conclusion? The right answer for how to manage your cash is going to depend on how much of it you have and what it is for. Oscar and Olivia’s strategy wouldn’t be the recommendation for Sam and Sarah. The strategy for managing your cash is an area of personal finance that, like insurance or cyber security, isn’t important until it is. With a little homework you can take the extra steps to make sure that your money is protected by FDIC limits. And because your cash serves as your peace of mind, we don’t recommend taking unnecessary risk. As always, you are not alone and we are here to help our clients and discuss questions about the strategy which makes the most sense for you.