Where do PPers park their short term/emergency funds?

[Jan Van]

Just wondering where y'all keep your short term monies. Short term treasury funds, other short term bond funds, CDs, foreign bond funds? Do you spread it around?

I still have it in mostly Vanguard ST Treasury (75%) and Vanguard IT Treasury (25%).

[KevinW]

A mixture of a credit union checking account and an online savings account.  I plan on swapping the online savings for Vanguard's treasury MMF after it reopens.

[AdamA]

I put as much as I can into short term treasury only money market funds (American Century Investments still has one with a very low minimum).  You can write checks from this account. 

[Lone Wolf]

This is my general ordering:

1. Checking account and "High-Yield" savings account for the really short-term money.  This can be spent immediately.
2. 0-3 year Treasury Note ladder in Fidelity account.  These can be purchased on the secondary market or at auction.  I hold these notes to maturity but they can easily be sold to raise "real cash" quickly if I need Federal Reserve Notes.  This is the bulk of my cash holdings.
3. I-series savings bonds and (a few) EE-series savings bonds.  Once these have been held for a year they can be used as short-term funds with a slight interest penalty.  And once they have been held for 5 years, they can be treated just like short-term cash.

I like having cash set up so that the great majority of it really can be converted into spendable money very quickly and reliably.

One nice thing about this low interest-rate environment is that I don't worry about the fact that most of my cash is outside of tax-deferred accounts.  This allows me to take advantage of the fact that the PP gives you excellent liquidity.

[MediumTex]

One of the things I like about the PP is that it provides a way of working your emergency and reserve funds into your overall investment strategy.

When people say the PP holds too much cash, I always want to ask them whether they have any ready cash, emergency funds or other highly liquid assets.  Often, when people add up all of their savings, bank accounts and investment accounts they are closer to 25% cash than they might have thought.

[moda0306]

I really think the 0-3 year treasury ladders or funds provide the best mix of return vs principal risk as opposed to MM funds holding too much money.

I-bonds are awesome.  They have a history of offering very juicy inflation portion interest (appears, when combined with the fixed interest portion, to fall pretty close to what 5-year treasuries are offering at the time) and are tax-deferred at the federal level and non-taxable at the state level.  I believe that these are probably a middle-class subsidized savings device that too few take advantage of. The tax-deferred aspect of these can make it much easier to bring one's self keep more of their "gotta have it now" cash outside of their IRA's.

Further, Ally 5 year cd's are paying 2.4% with a 60 day interest penalty, so can function extremely well as a cash-like investment.

I think playing around with cash amongst safe (at least FDIC insured) options is one of the more fun tinkering aspects of the PP. 

[AdamA]

I think playing around with cash amongst safe (at least FDIC insured) options is one of the more fun tinkering aspects of the PP. 

Am I paranoid in that I don't really trust the FDIC to come through in a bad banking crisis?

[moda0306]

I don't know about that... I figure that the FDIC is to cash what ETFs are to gold to some degree, but probably even more safe.

A little paranoia proved very lucrative in the past 10 years, so I can respect that attitude.

[moda0306]

I actually (especially in a low interest environment) think that one should have $500 to $1,000 (or more?) in a safe.  I'm all about deversifying risk/return within cash (albeit within FDIC or safer accounts), but that's probably more me being a busy-body.

[moda0306]

One last thing... are we maybe being a little more picky about cash being safe than gold?  I feel a lot less comfortable about Gold ETF's than FDIC insured savings accounts.  Does anyone feel the same way?

I would put all my cash in an FDIC insured account long before I'd want all my gold in ETFs.

[Lone Wolf]

I would put all my cash in an FDIC insured account long before I'd want all my gold in ETFs.

I completely agree.  I think that some exposure to either one is probably fine but the percentages are probably best controlled.  It's hard to imagine completely doing without either one, but FDIC in particular.

With cash, it's generally necessary to have at least a checking account.  Some people manage to completely do without this but that sounds like a real pain.  I also find that a very modest-sized HYSA can give your checking account a cash infusion helps make things even simpler.  I also like my FDIC-insured Health Savings Account.

For gold, rebalancing is a lot simpler if you're willing to take a little bit of ETF exposure.  If you want to hold any gold in a retirement account (to shield yourself from the collectibles tax), the ETF is again your simplest option.

Other than that, though, I think that Treasuries and physical gold are superior.

[MediumTex]

When thinking of the FDIC, I think it's important to remember that its real purpose is to prevent wide scale runs on banks, NOT to somehow deal with the aftermath of such an event.

In the event that there were wide scale runs on banks, I think it would be clear almost instantly that the FDIC provided the same level of protection as a copy of the Constitution does against a bayonet thrust.

[moda0306]

MT,

I see your point.  Do you see a gold ETF as having more or less risk than the FDIC savings account relative to their safer alternative (treasury account and physical gold)?

[AdamA]

One last thing... are we maybe being a little more picky about cash being safe than gold?  I feel a lot less comfortable about Gold ETF's than FDIC insured savings accounts.  Does anyone feel the same way?

I would put all my cash in an FDIC insured account long before I'd want all my gold in ETFs.

This is the headache of gold ownership.  I don't trust others to hold it for me...but I also don't really trust myself with it (theft, safe deposit box fraud, dropping a coin in the toilet, etc...)

But...to answer your question, I trust the US Treasury more than a gold ETF or the FDIC.  I think that in a crisis they will do everything possible to make sure that those who own short term debt are paid in cash without delay.  Failure to do this would totally destroy their credibility and would be a HUGE disaster. 

[MediumTex]

MT,

I see your point.  Do you see a gold ETF as having more or less risk than the FDIC savings account relative to their safer alternative (treasury account and physical gold)?

I think it's a completely different situation with the ETFs than with the FDIC.  The FDIC is basically purporting to provide insurance on an enormous pool of assets with a tiny, tiny, tiny amount of reserves.  No private insurance company would ever be allowed to operate this way.

The ETFs, OTOH, are not providing insurance against the collapse of a financial institution--rather, they are simply buying and storing an asset and issuing shares of ownership in the stored asset.  There are probably still any number of things that can go wrong with this setup (though I tend to think the game is relatively clean--if it weren't there would be a larger spread among GLD and IAU, for example), but the arrangement doesn't appear to me to be as structurally fragile as the FDIC.

It's ironic, too, that with the stock and bond ETFs there aren't a bunch of alarmist stories about whether they REALLY own all the stocks and bonds they claim to in their filings.  It's sort of like how Wall Street guys talk about "hoarding" gold but "accumulating" stock.  It's kind of goofy, really.

[Lone Wolf]

I agree that the FDIC is an extremely fragile structure.  I make a conscious effort to keep my exposure to it under 20%.

However, I think that the government would go to great lengths to keep the banking system from failing.  Once the FDIC fails to meet a single one of its guarantees, a panic would only accelerate.  I think it is extremely likely that the government would crank up the printing presses as aggressively as necessary to prop up the FDIC in the event of a full panic.  I believe that the government would favor sticking the taxpayer with the bill or risking inflation over allowing the banking system to collapse.

An ETF, while a much more structurally sound arrangement, is standing between you and your "asset of last resort", the one that is supposed to be "nobody else's paper promise".  I think that it fundamentally changes the relationship between you and the asset.  Because of that, I'm very uncomfortable with a large level of exposure.

By the way, nothing has ever made me feel more nervous about the FDIC than this video where Suze Orman and "Edie the Estimator" assure me that FDIC accounts are 100% safe. 

[fnord123]

Before everyone decides the FDIC guarantee is toilet paper, please consider the following:

• The total amount of cash (dollar bills, ten dollar bills, etc.) in circulation is only $829B.  Source: http://www.newyorkfed.org/aboutthefed/f ... fed01.html
• By statutory law, the FDIC can borrow $100B from the treasury. Source: http://www.fdic.gov/regulations/laws/ru ... -1600.html
• In times of trouble, Congress has talked about loaning $500B. Source: http://www.foxnews.com/politics/2009/03 ... c-billion/

So for emergency cash, even if we assume the FDIC insurance fund is empty, they can easily borrow from the treasury nearly as much cash as there is in existence today.

Let's go ahead and stipulate a bank run due to financial collapse of some sort (even though no bank run happened in 2008-2009). What do people think is more likely to happen:

• Despite the info posted above, FDIC doesn't get enough cash, and reneges on its obligations.  A major portion of the US population would flip out here, or
• The government and the Fed would step in and loan/print the dollars needed, loaning $100B, $500B, $2T, whatever.

Note that the Fed has printed hundreds of billions of dollars due to a measly Great Recession, and the Treasury has run trillion dollar deficits for the same reason.  Why do people think in a much more dire situation they would not do at least the same thing?

Also, if the scenario is so bad that the FDIC is collapsing, do people really think that Vanguard or Fidelity or whatever would not also be collapsing?  Do all the "I don't trust the FDIC" folks hold their ST treasuries in TreasuryDirect.gov or in paper bond form?

[moda0306]

LW,

That's where I have a real problem with the ETFs.  The FDIC may not be appear capable of covering the banks on its own, but the mere fact that greenbacks would be in high demand tend to reinforce the fed/treasury's willingness and ability to step in and make sure there is no failure.  Of course I don't want to bank all my cash on this assumption, but there you have it.  But I mean, are we really saying that the same Fed/Treasury that will make its interest payments with the press of a button and we're SO sure they'll never fail to pay (nominally anyway) will let the FDIC evaporate and let their be a run on the banks?

I just don't think that when push comes to shove that there will still be this imaginary wall between the fed, treasury, FDIC and banks, and you'd see the entire group doing what it had to do from keeping the system from collapsing.

Gold, on the other hand, symbolizes the exact opposite as what an ETF represents... and they seem to be frictional to each other if and when the rubber ever met the road.  "OMG, contracts are breaking down... paper promises don't mean anything any more... the dollar is collapsing... quick, go get our GLD statements and we'll hit the road."

[moda0306]

Amen fnord... also if you look at state and local governments, who are much more divorced from the federal government, the treasury and the fed than the FDIC is, and you see how much support they've gotten since the crisis, it makes one wonder to what degree we should look at the solvency of governmental entities in a vacuum.

[MediumTex]

Do all the "I don't trust the FDIC" folks hold their ST treasuries in TreasuryDirect.gov or in paper bond form?

I don't know if you are counting me as one of the non-trusters, but to clarify my position my trust in the FDIC is not the point I was making.

The point I was making is that the FDIC is mostly a feel good story, as is the entire framework of fractional reserve banking.

The important thing from the individual investor's perspective is to make sound and calculated judgments of risk with respect to his own assets.  I think it is perfectly fine to put money in a bank (or better yet, several banks), so long as the depositor understands the range of risks he is running and how they differ in nature from those that a purchaser of treasuries runs.

In my view, the principal real-life risk in bank deposits is not that you will lose your money, but rather that there could be a delay in your ability to get your money back through an FDIC-like guarantor of deposits.  In a situation of unanticipated instability, having ready access to cash can be of supreme importance, and a delay of 4, 6, 8 weeks or longer in being able to access your money could represent a bigger problem than it might be during normal times.

To repeat, bank deposits are okay, just understand the nature of the risk.  The slogans and platitudes about the FDIC are, I think, misleading.  I'm sure that the FDIC, one way or another, would figure out a way to plug almost any conceivable banking crisis, but the investor needs to bear in mind that the whole concept of deposit insurance is of relatively recent vintage in the history of banking and the one time it was put to a real test in the Fall of 2008, it began to look very flimsy very quickly.

[AdamA]

exposure.
By the way, nothing has ever made me feel more nervous about the FDIC than this video where Suze Orman and "Edie the Estimator" assure me that FDIC accounts are 100% safe.   :)

That is video is awesome.  Why don't you trust Edie, LW?  

It's ironic, too, that with the stock and bond ETFs there aren't a bunch of alarmist stories about whether they REALLY own all the stocks and bonds they claim to in their filings.

That's true, but I still prefer an Index Fund to ETF for my stock holding.  VFINX has at least been around for a while.  

The thing that bothers me about ETF's right now is how many are popping up.  I've had people telling me about the various ETF's they own...funds that hold agriculture, India, inverses, etc...some of these are based on futures contracts, or are structured in various ways that are too complicated for me to understand.  It has a faddish feel to it that makes me worry.  

Totally my own opinion, though, and based on no evidence/numbers.  Just my gut.  

[fnord123]

Responding to the thread title, here's my breakdown of where I keep short term/emergency cash:

• Cash in safe - two weeks worth.
• Checking account - three weeks worth - 1% interest rate
• Ibonds - three months worth - various interest rates
• Savings account - six months worth - 1.4% interest rate

For me, ~10 months worth of "emergency cash" is sufficient to make me comfortable.

I've debated whether to increase the "cash in safe" component.  It earns no interest, but I worry sometimes about my bank accounts being frozen or something (bank error, unexpected legal event, etc.).

[fnord123]

The important thing from the individual investor's perspective is to make sound and calculated judgments of risk with respect to his own assets.  I think it is perfectly fine to put money in a bank (or better yet, several banks), so long as the depositor understands the range of risks he is running and how they differ in nature from those that a purchaser of treasuries runs.

I agree with this.

In my view, the principal real-life risk in bank deposits is not that you will lose your money, but rather that there could be a delay in your ability to get your money back through an FDIC-like guarantor of deposits.  In a situation of unanticipated instability, having ready access to cash can be of supreme importance, and a delay of 4, 6, 8 weeks or longer in being able to access your money could represent a bigger problem than it might be during normal times.

If this is advocating cash in hand, then I agree. If this is advocating treasuries, then respectfully, I disagree

If one's bank is closed (and/or the FDIC fails), where would people who hold treasuries go to get their money?

• If Vanguard/Fidelity haven't collapsed, people holdings their treasuries there will be in trouble - you have to sell them, then wait several days for the money to show up in the associated money market account (btw, in 2008, a money market did fail and break the buck, while no FDIC-insured losses happened), then finally ACH or wire transfer the funds it to a bank account (but the banks are closed...).
• If people are holding their treasuries in TreasuryDirect.gov, they ACH the cash to a bank (again, the banks are closed...).
• As it turns out, all current treasury bills are electronic only, so there is no other way to cash them than the above, is there?

Basically, if the banks fail/are closed, anything but cash in hand (or maybe silver/gold, or worse yet, lead ) will be very hard to use.

[AdamA]

If one's bank is closed (and/or the FDIC fails), where would people who hold treasuries go to get their money?

This is from Martin Weiss...I know, I know, he could likely just be selling something, but it's an interesting perspective...

Question #3. “Suppose there’s a bank holiday and I need to cash in my Treasury bills. Since the Treasury Department and the Treasury-only money market funds use banks for transfers, won’t I be locked out of my money too?”?

We actually have a real precedent for a similar situation. In Rhode Island in 1991, when the governor declared a state-wide bank holiday, all the state-chartered savings banks were closed down. Every single citizen with money in one of those banks was locked out.

At the time, one of our Safe Money Report subscribers happened to have a checking account in one of the closed Rhode Island banks. Thankfully, he had almost all of his money at the Treasury Department in Treasury bills, so his money was safe. But he called and asked: “The Treasury is set to wire the money straight into my bank account, which is frozen. Will the money the Treasury wires me get frozen too?”?

In response, I told him to check his post office mailbox. Instead of wiring his funds, the Treasury had taken the extraordinary measure of cutting hard checks and mailing them out immediately. They wanted to make absolutely sure he got his money without any delay.

The moral of this story is that, even in a worst-case banking scenario, the Treasury will do whatever is necessary to get your money. We can’t forecast exactly how. But they will probably send you hard Treasury checks. And they’ll probably designate special bank offices in every city in every state where you can cash them in. Ditto for Treasury-only money market funds.

[fnord123]

Interesting!

I guess that works for TreasuryDirect holdings.  I don't think Vanguard/Fidelity/whatever broker will necessarily make such special arrangements.