Some of my best financial education I learned while in banking…
For instance, what I’m going to share with you today I learned from a fellow branch manager back in 2002 or so. And it has paid big dividends for clients I’ve advised ever since.
The drawback about most financial “advice” from financial “advisors” is they look at cash as a dead asset. Thus they’re always trying to get you to invest your cash purportedly so they can get you a better rate of return. But really it’s so they can charge you fees. Awful hard to justify a 1% fee when the cash on your balance sheet is paying less than that.
So, ‘advisors’ don’t look at the cash as worthwhile or they try to get you to move it. Don’t fall for that!
I showed you what NOT to do with your cash in this video. Now I’m going to show you what to do with your cash instead.
This is a tough one to explain by words so if you are not following along go to this video for the visual aid.
You know how much I like the barbell approach to retirement planning. Keep a bunch of cash, ideally 3 years worth, and the rest in stocks. NO IN BETWEEN thus NO BONDS..
But for the cash do you just leave it in a checking account paying squat? Of course, not! You keep 1 year liquid, I was informed that Vanguard’s money market is paying nearly 2.5% right now! Not sure if you can write checks on that, though. You probably can
For the rest you do laddered cds. For example, you have your first year of cash needs covered by the Vanguard Money Market. The second year, you’d have a 1 yr cd. Say one that pays 2.6% or so. Now for the third year you see if there are any longer term cds out there that are pay decently and you find a 5 year cd that pays 4%. Do this!
Oh I can hear you saying… “But Josh it’s a 5 year CD why would I want to lock up my money when I’m going to need it in 3 years???”
Because the 5 year cd pays so much more than anything else that even after surrender charge, the cost of breaking the CD before maturity, you are still way ahead than if you simply did a 3 yr cd.
Most CDs have a surrender charge of 3 – 6 months of interest. So, you calculate the interest you’ll receive over the 3 yrs you have the CD working for you, subtract say 6 months of interest when you take an early withdrawal, and ideally you’ll still be WAY ahead of where you’d be if you only did a 3 yr CD.
Now in this market, with a very flat yield curve, it’s going to be hard to find 5 year CDs that pay significantly more than 1 or 3 yr cds. Yields now on a 6 month T-Bill are around 2.40%. Yields on the 30 Year Treasury bond are right around 3%. That’s a FLAT yield curve, meaning you’re not getting much reward for taking the risk of locking up your money longer.
But it’s still worth the search. Can you find a “teaser” rate from a local Community bank? There probably are deals out there. I did a video a few months back that Navy Federal Credit Union had a 40 month CD paying something like 3.8%.
I’m telling you, folks, if you can find something like that gobble it up. Obviously, make sure it’s FDIC. Make sure it’s from a well-known reputable bank(are there any left anymore?). Finally, make sure it’s not a Structured product that is FDIC insured. These are products you get from a broker that are investment themed but somehow retain the FDIC protection. Nah. Don’t need that here.
But a little bit of elbow grease may find you with a couple extra thousand dollars in your account. That’s REAL money! Let’s say it takes you 2 hours of work to get an extra thousand dollars? What’s your labor cost?
$500/hr. If you were to have made $500/hr while you were in the work force you’d be a wealthy, wealthy person today.
Hope this gives you some food for thought.