Tuesday, January 20, 2009

Convenience vs. yield on cash

Prior to September, I had never kept any substantial amount of cash in a bank for most of my adult life. Money market funds have offered a better combination of convenience and yield. Yes, bank CDs have frequently offered higher yields, but at an extreme loss of convenience. The last time I had any cash sitting in a bank account, other than a pay check's worth, was back in 1983, over 25 years ago. But, now, I am currently keeping the bulk of my cash in several bank savings and money market accounts due to the significantly higher yields with only a minimal loss of convenience.

For those 25 years I enjoyed the convenience of being able to write a check or use an ATM to access my cash while it was earning a much better yield in a money market mutual fund than any bank checking account.

I do miss the modest extra convenience of leaving the cash in the brokerage account and not having to worry about transferring funds to cover a check, but the yield differential is simply too great to ignore.

Actually, in recent years I was keeping my cash in a different money market fund than the "core" cash fund to get an even better rate, and then selling (or buying) that fund depending on my cash flow and needs.

One major difference from years ago is that ACH electronic transfers between bank accounts and brokerage accounts are now very common and not that inconvenient, so I can keep cash in an online savings account for better yield and then do an ACH debit to move the cash to my brokerage account (using the routing and account information for the checking account associated with the brokerage account.)

There is a modest extra inconvenience in that the ACH transfer could take an extra day or two depending on the bank compared to next-day when selling a money market mutual fund to move money to the core brokerage account, but that feels bearable compared to the dramatic yield differential.

On the other hand, if your gross amount of cash is more modest and/or you value pure convenience more highly, simply keeping your cash in either the "core" brokerage account or next-day away in a money market mutual fund that can be quickly sold, money market funds can still be more attractive than bank savings and money market accounts despite the yield differential.

Besides, if you really want a significantly higher yield, you might consider selectively investing in stocks that have either growth potential and/or have a dividend yield significantly higher than even most bank accounts and even CDs, albeit with a higher risk.

But, for me, given that I am sitting on a relatively large pile of cash as I deal with uncertainty as to my income over the coming year, a decent yield is fairly important, even if it is modestly less convenient to access a bank savings or money market account compared to managing money market mutual funds in a brokerage account.

Bank accounts do have the added plus of FDIC insurance, but I am not so worried about the safety of the better-managed money market funds, such as Fidelity.

CDs can become attractive when you have cash that you are sure that you will not need for the next six months or a year or two, but I am not in such a lucky circumstance. Besides, some of the online savings accounts are offering better yields than most CDs. Once again, it may be a convenience vs. yield issue.

Every individual needs to prioritize convenience vs. yield for their own particular circumstances.

-- Jack Krupansky


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