Cash: It's not such a bad idea
By Bob Moeller
WEAC Member Benefits
November 2006
Financial
Planning Seminars
Achieving
Financial Independence
I met with lots of members this past summer and noticed
many of them had sizable amounts in savings, money market funds, CDs,
and similar cash investments. Many expressed that they “knew”
they should probably be investing more in stock mutual funds but with
the Iraq war, terrorist threats and other societal worries they just
didn’t want to carry a lot of risk. I told many of them to remember
one important investment rule: Don’t forget you have to sleep
with your investments every night.
To give you an indication of teacher investment sentiment, the WEA
Trust has well over $1 billion in its tax-sheltered annuity, which offers
many excellent stock mutual funds, and I’m told about 70% of the
money is invested in the guaranteed fixed interest account.
Is that wrong? Well over time the stock market does better than cash
type investments. But there is nothing wrong with seriously considering
cash as part of your investment world. This is especially true now that
the government has raised short-term interest rates dramatically over
the past two years.
But you must consider cash as an investment and not just a parking
place for your money. It is important that you work at cash investing
a little in order to get the best returns. Over the summer I probably
talked to members who in total had way more than $1 million in cash
accounts earning less than 3% when it is easy to earn 5% or more. So
what are the options now?
First, a good insured bank money market fund will be paying close to
5%.Your bank or credit union has money market funds available. Check
out the deal in terms of minimum investment required etc. If it’s
not paying 5% or close to it with reasonable balance requirements ($2,000
or less), look elsewhere. The general money market fund rules are that
you get to write three checks a month and make three “other”
withdrawals a month.
Using the program I outline below, three checks a month is more than
enough. Similarly, a good money market mutual fund will have equally
high returns. Although these mutual funds are not insured, no one has
ever lost money in them. I recommend you check out Vanguard at 1-800-662-7447
or other no-load mutual funds. Vanguard will generally yield a little
more because its fees are somewhat smaller.
Second, CDs are a good investment if you shop carefully. I prefer them
to bond mutual funds now because if interest rates rise bonds will go
down in value, and over the past couple of years this fact has severely
reduced the return in a lot of bond funds. Get a good idea of CD rates
nationwide by going to www.BankRate.com. Then shop locally to see if
any local banks have higher rates. I met one member this summer who
somehow managed to get 6% locally for a one-year CD when general competitive
rates were about 5.6% maximum. Until rates seem to be stabilizing, don’t
buy long-term five-year CDs. Currently, your return on a five-year CD
might even be lower than on a one-year CD because we have an inverted
interest rate curve. If you happen to believe that interest rates will
start going down again, then tying up your money for longer periods
works, but most experts seem to think rates will stabilize or go up
some more.
I suggest the following to maximize your earnings on funds you will
use for expense fairly soon. This is how you want to manage your short-term
immediately available funds for the rest of your life.
- Set up a money market fund or a money market mutual fund as described
above. Put your low-rate savings accounts into it. Direct your payroll
to electronically deposit your paychecks here. If retired, direct
ETF and Social Security to deposit your checks here. Now you are getting
top interest immediately on your cash.
- Keep your small local free checking account. You will want to use
this to pay your bills as you always have. Keep a small balance here.
- Whenever you are going to write a number of checks which will total
more than your balance in your checking account, write a covering
check out of your money market fund and deposit it into your checking
account. Then send out the checks you wrote.
Once you set this up you will be automatically earning top dollar on
your liquid cash investments.
Combining that with carefully chosen CDs will result in a well-managed
cash portion of your investments.
Posted November 1, 2006