What can I do with cash right now? (April 2023)

The Money Pig Podcast, sponsored by Goodwin Investment Advisory, discusses what to do with cash in April 2023. Host Reid Trego interviews Justin Pitcock, a Certified Financial Planner™ PROFESSIONAL.  The podcast covers the economics of interest rates and inflation from 2022-early 2023 that caused banks to take too much risk when investing depositors' money. Options for cash include checking accounts, savings accounts, money market accounts paying around four and a half percent right now due to Fed raising rates; CDs ranging from several months to years; and Treasuries backed by the full faith and credit of our government yielding about four and a half percent currently. For clients with short-term goals or expenses less than two years away who want ultra-conservative investments or larger dollar amounts businesses have cash flow needs but want to be prepared for things like upcoming expenses we offer laddered CDs or Treasuries through brokered CD purchases that mature at certain times every six months so reinvestment can happen if needed.
Justin and Reid discuss the importance of investing for long-term goals like retirement, rather than relying on cash alternatives like CDs. They highlight the need to consider individual goals when investing and caution against reinvestment risk in a changing interest rate environment. 

The Money PIG podcast is hosted by Reid Trego, a financial advisor at Goodwin Investment Advisory. The podcast is intended to share information and perspectives, but should not be interpreted as legal, financial or tax advice. The opinions shared by participants are not necessarily endorsed by the company. 

Goodwin Investment Advisory is regulated by the SEC, and the company operates in compliance with applicable securities laws and regulations.

Transcript

Welcome to the Money Pig Podcast, brought to you by Goodwin Investment Advisory, where our mission is to lead people to financial peace, independence, and generosity. I'm your host. Reed trigo. Today on the show, we're joined by Justin Pitcock, certified financial planner practitioner, for a discussion about what to do with cash. Right now. It's April 2023. What can we do with cash? This is going to be so interesting. Thanks for being here, Justin. 



Thanks for having me. 



All right, here we go. So just to set this up, a lot of people keep cash in a lot of different ways. We've seen it. They bury a hole in their backyard, put it in a mattress, whatever. Of course, we recommend they put it in their freezer because it's somewhat fireproof. 



That's right. As long as you have enough frost in the freezer. 



That's right. But for the record, we'd recommend a bank. Okay. But typically, people keep cash for, like, a purpose. Maybe they're saving up for an emergency fund or a car or a home down payment or whatever. And in 2022, were facing this inflation, and people would save this money and they'd be like, this is really depressing because I put in a savings account that doesn't earn anything, and it's eroding by seven or 8%. And so it was really inflation. Yes, because of this inflation. So some things started happening. I wanted you to talk a little bit about the economics of what happened, really through 2022 and early 2023 so far. 



All right, so it's zurp Zerp. 



Okay. 



We went through, like, a decade of low interest rates. Rates went lower. We had COVID, they went even lower, and there was no yield on cash. Well, we started getting inflation because of all the stimulus that our government has done in response to COVID. Caused a lot of inflation, as we saw last year. So they had to raise rates in response to that. And so with the higher rates, now we have options for cash. And unfortunately, the low rates for a long period of time caused a lot of people, businesses, and included, banks included, to take too much risk because they were trying to get yield. There was no yield. Well, there is now. It's already come back down from the peak in response to the bank failures. 



Right? Yeah. Speaking of bank failures. So, okay, I put my money in a bank somewhere. Is it actually going to be safe? We've had two banks, maybe three. Suisse was, like, on the verge. 



So Credit Suisse has been struggling for a long time. Okay. So they finally crumpled. Probably heard of, like, Silicon Valley Bank, signature bank in New York. Those banks failed due to poor management. Really? And talking about these low yields for a long time, when a depositor took money to their bank, they had to reinvest that in order to get some sort of yield. And they would invest in treasury securities or high quality debt. And back then, the longer the maturity, like when that debt would, when they would get repaid, those yields were higher. And so they were going out too far from for a maturity in order to try to get some yield on their depositors money. Well, when interest rates rose last year, it caused the value of that collateral to go down. 



And then when everybody wanted their money back, the collateral was worth less than what those deposits were. 



And were just talking before we hear that. I actually have an econ degree and I knew that interest rates and bond prices were inversely related. Like by definition, I knew that was true back in college 30 years ago. I did not understand why until about two years ago. I don't know how Indiana University let me get out of there without understanding that. But they did and you were very kind. You said, well, you haven't probably put it to use in forever, but it was just funny. But yeah, so that's what you're talking about is they had all these banks had bought up these Treasuries high quality debt. 



We're talking about treasury securities, mortgage backed securities. They're high quality. I mean, it's backed by the full faith and credit of the US. Government. But they took too much interest rate risk. And so as interest rates rose, the short term value of those bonds lost value. Now if they were able to hold them to maturity, they were going to be worth every bit of what they paid for them. But the problem is they couldn't because depositors wanted their money back. 



That's right. And was it 30% of the depositors? It was a run on the bank for like 30%, right? 



Yes. The fed stepped in. They've solved the liquidity crunch. Basically, they're taking those bad investments and holding them because they're still worth the full amount if you hold them to maturity. But the Fed is giving them a short term loan to fund kind of this liquidity. 



Awesome. Thank you for that explanation. So let's talk about options for cash pretty shortly. Basically we've got money market CDs, Treasuries, and I want you to just walk through those briefly and talk about sure, what that looks like. 



So you've got your checking account that's just cash. It doesn't really pay you much of anything. Maybe you're getting a little bit right now. The next step up is a savings account and the bank is able to pay you a rate of interest on that because they take the money that you put in the savings account and they use that to make their loans. So they're using your money to loan it out to somebody else for a higher rate or a higher rate of interest than what they're paying you. 



It's a wonderful life. Yes, that's right. 



And it works until everybody, all the depositors want their money back at the same time. 



Again, we saw that It's a Wonderful Life, great Christmas movie and practical. 



Here we go. So that's where the FDIC insurance comes in. And you're insured up to 250,000 per account type. So if you've got an IRA that you have cash in that's account type an individual account, you could have a joint account. If there's two owners on the account, well, then it's 500,000, not 250. So you've got FDIC insurance on that. Any sort of bank account that would include CDs. Kind of talking about the progression of things. Like you've got the checking, you've got the savings, it's paying a little higher amount. Okay. Now you can go to a money market account, and that money market account pays a higher rate because your money is actually being reinvested into cash alternatives. And that would basically be like treasury or agency backed securities that mature in a very short number of days, like less than 26 days. 



Wow. 



And right now, the overnight lending rate from the Fed raising rates is paying five and a quarter. So money market accounts are paying a pretty good bit. So you as like the retail investor, the consumer. You're not going to get the full amount because the bank has to process this. Right. In money market accounts, you can probably get somewhere around four and a half percent right now. That difference is what the banks charge in order to provide this service to you. 



Got it. 



So there's checking, savings, money market, and then kind of the next step would be like CDs and that's like certificate of deposit. The banks giving you a higher rate of interest kind of on an agreement that they get to use your capital for a defined period of time, and that could range over a number of months to a number of years. So it's again, FDIC insured, we need to spread our risk over different banks. So if you got more than 250,000, all right, we need to have CDs at multiple banks. 



Right? 



And we actually had a person come in that had CDs over like 100 different banks. Gosh, I can't imagine that's like a headache. But anyway, so we're talking about cash alternatives. CDs could be like a cash alternative, but now we're getting into a longer time frame. 



Speaking of that client, they go to banks like I go to national parks just to visit. Oh yeah, for fun, they have CDs. 



Mature. Let's go vacation down here. 



I love it. I think it's great. Okay, very funny. Sorry to interrupt. Keep going. 



The other option may be like Treasuries. Okay. If you're uncle screwed and you get more money than you can spread around different banks, like, what's your option? Okay, Treasuries. And sometimes treasuries yield more than CDs. Right now, CDs are yielding more than Treasuries. So we prefer CDs. That's not always the case, but a treasury is basically a bond that's issued by the US government. It's backed by the full faith and credit of our government and us as taxpayers. 



It's an IOU. I'm going to loan you $1,000. You're going to pay me back at the maturity date, whenever that is. In the meantime, you're going to pay me this agreed interest. That's right. 



Yield. 



Yes. That's how it works. 



So Treasuries are paying about four and a half right now, and CDs are paying maybe a twelve month. CD is paying probably about five right now. We prefer CDs, but just a month ago Treasuries were yielding more than CDs. So that's something that we want to pay attention to. But if you're looking at a cash alternative somewhere that there's no credit risk, those are two really good options. 



Awesome. So what do we do for clients? If they come in and they have a bunch of cash, they want to play it really conservatively, maybe not be in the market. What do we offer here? 



It's a great question. We always need to have our cash or cash alternatives based on like a purpose or a goal. If it's a short term goal, maybe less than a couple of years, then we need to be ultra conservative. If you know you're going to need that cash if it's for routine expenses, okay. We've got to keep that in a check in your savings account. If we know that we've got this upcoming expense, all right, now we can kind of lock that money away. So a CD or treasury would be great. We can ladder that. I know some businesses have cash flow needs, but they want to be prepared for things. We're talking about larger dollar amounts here. We offer a cash alternative strategy where we'll ladder CDs or Treasuries, whatever's paying the most. 



And with CDs we can buy those in a Fidelity brokerage account and we can shop hundreds of banks all over the country without you having to go on vacation to these places to buy the CDs. So those are called brokered CDs. We can do that for you and we can ladder them where we have a rung of CDs that mature at a certain time if you need the money. 



Okay, great. 



There it is. If you don't, we reinvest it again at the end of that ladder. So if we're doing like a twelve month ladder, we have some CDs that mature in six months, some more that mature in twelve. So every six months we're reinvesting that money twelve months out. 



Well, and you get the choice. Then you're like, hey, are interest rates still strong enough to make this a worthwhile investment in six months? You're like, well that wasn't any good. Or when that matures you're like, maybe there's another alternative now. And if you're sitting there maybe nearing retirement or in retirement and you want cash every six months that you're going to live on, this is a way to lock it up for a little while. Can't really get to it. You could, but you shouldn't. And then you have cash right. To live on. Yes. 



So you should always invest for your goal. And this great point is a great point that you bring up here. Retirement is not a short term goal. Ideally, if you get to retire in your 60s, gosh, hopefully retirement is going to last 30 years or more. 



Right. 



CDs are not a good option for that. I think retirees should have a good cash buffer between them and their investments, their stocks and bonds. CDs can be that cash buffer. A small amount of what they've got, but enough to cover their living expenses for maybe a year. Everything beyond that needs to be earning a higher rate of interest or higher rate of return, because you need that to beat inflation over the rest of your lifetime. And in order to do that, the stock market's really historically been the only place to beat inflation over a long period of time. 



Yeah. Fantastic. And so it'll be interesting if we start seeing inflation come down, which the Fed's efforts have not been super effective here. I don't think it's come down a little, but I don't know. But if we start to see that come down, will they pull interest rates back down again? 



Yes, and we've already started to see that. So we could have locked in rates a few weeks ago that were a good bit over 5%. There's some CDs now that are still paying about five. Some new issues out there, but the bulk of the CD market has already dropped down to about 4.9. Treasuries have gone from five and a quarter down to about four and a half. So we've seen rates come down a good bit over a short period of time. That's because expectations have changed from rates continuing to rise to, okay, maybe rates are going to come down. That brings up another risk. When you buy CDs, you have the reinvestment risk. What are you going to do with that money when it matures? 



If rates are lower, you may not want to reinvest that money again at two and a half, 3%, just after taxes, it doesn't make sense to lock the money up. 



Absolutely. 



That's why you always invest money based on the goal for that money. If the goal is to preserve principal regardless of making any return on that money or not. Okay. That's what this is for. But if this is for retirement or something that's long term, we still need to be investing in the market. So stocks, bonds, maybe real estate, we don't want to put our retirement in these cash alternatives. 



That's amazing. I just love talking about economics with you because you're very smart and we appreciate that around here, for sure. Well, Justin, that's great. Thank you. 



Yeah, happy to be here. 



Awesome. That's great. And as financial advisors, we manage and rebalance portfolios. That's kind of what we do. But the real value is that we work to understand our clients individual goals so we can have these types of conversations about how to invest for a purpose and for a goal in the long term, because they're very unique and personal to each individual. So, again, Justin, thanks for being here, and we'll catch you all next time. 



The Money Pig podcast is hosted by Retriego. Goodwin Investment Advisory is a registered investment advisory firm regulated by the securities and Exchange Commission in accordance and compliance with security laws and regulations. Goodwin Investment Advisory does not render or offer to render personalized investment or tax advice through the Money Pig Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.