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“Put your money to work,” my grandmother would advise. Getting the highest possible return on your cash seems to be a mark of honor among frugal prospective retirees. But, with interest rates in the tank for most of a decade, if you haven’t bothered, you also haven’t been hurt much.

dollars through hourglassNow, rates are rising. So, it might be more important to maximize the return on your cash. Is it worth the effort? The usual reaction is of course you want the highest interest rate available! But that doesn’t necessarily factor in the cost of your time, and any risk involved….

With my 2-year cash stockpile running low, rates going higher, and the market headed toward a correction, in recent months I sold a large position from our investment portfolio. That left me with a 6-digit sum of cash on hand.

What to do with it? Given the possibility for a rockier economy ahead, we’ve been watching our income and expenses. By being proactive about our cash flow now, perhaps we can avoid more painful cuts down the road.

As part of that process, I re-evaluated how we’re managing our short-term cash holdings. I looked at a number of the available options — standard savings accounts, online savings, CDs, and bond funds — and made some modest changes to our accounts. In the process I traded off a number of important factors including yield, interest rate risk, default risk, and time commitment.

I’ll explain my evaluation process, and my decisions, below. Then, I’d be interested to hear what you do with your cash. How far afield are you willing to go for a better return?

Standard Savings

By “standard” savings I’m referring to a conventional savings account at one of the major, brick-and-mortar banks. At the time I write this, interest rates at such accounts are in the neighborhood of 0.5%. That’s better than they’ve been in a long time, but still a paltry return that doesn’t even begin to keep up with inflation (currently running around 2%).

There is no interest rate risk with a savings account, because the value of your principle will not fluctuate with interest rates. There is no time commitment for your funds either, though you will likely be limited to six transactions in your account per month. And there is no default risk, to a point, because you are insured by the FDIC for up to $250,000 per depositor, per FDIC-insured bank, per ownership category.

In my case, $250K is way more than needed to cover the couple of years of living expenses I tend to keep on hand. But, if you need more than that in cash, you’d be advised to spread it around to different institutions so as not to go over the insurance limit.

Finally, there is minimal hassle or time investment, for me, in maintaining a standard savings account. I already have decades-old relationships at two traditional banks — Schwab and USAA — that have proven trustworthy over the years.

Online Savings

Since at least the first FinCon (annual financial bloggers’ conference) I attended in 2012, when Ally Bank was introducing its online products, I’ve been aware of the pure online banks offering high-yield, FDIC-insured savings accounts. Recently I researched my options in that space, again. On the surface, what’s not to like about higher yields and the safety of FDIC coverage? But, as I dug deeper, I found some worrisome issues….

I began my research at Bankrate.com which, among other services, ranks the best mortgages, CDs, savings accounts, and credit cards in easy-to-read online tables, like the one at the bottom of this post. Do be aware of their disclosure: “The listings … are from companies from which this website receives compensation, which may impact how, where and in what order products appear.” And they may not include all companies or all available products. Nevertheless, I found a wide variety of offerings.

I zeroed in on a couple of the banks at the top of Bankrate’s list for online savings accounts, offering rates of more than 2%. Wow, that sounded good. It was nearly four times the rate I could get on my best standard savings account.

But as I researched further, I started to see problems. One of those banks had a history of rolling out new product brands, while reducing the rates on their old brands. It was classic bait and switch, played out over a longer time interval. So, you do all the work to set up an account and move your savings over, then, sometime in the following years, the bank quietly reduces your rate. How long before you even notice? And how long does it take you to research your options and make another move, if you ever do?

Another bank was tiny. Their Android banking app had only a few thousand downloads. I didn’t fancy being a software tester with all my liquid savings.

I kept scanning down the list, willing to accept a slightly lower yield to deal with a larger institution whose name I could trust. Finally my eye settled on Ally Bank. I’d always had a good impression of them from the exposure within the FinCon community. And I know plenty of my fellow bloggers use Ally.

But as I continued my research around the web, my misgivings grew. Ally’s user reviews on Credit Karma were disturbing. Apparently they, and other banks, have outsourced their customer service overseas in recent years. The result seems like far too many stories (for my comfort level) of serious banking errors, with customers being denied access to their money for lengthy periods of time.

I absolutely cannot afford poor customer service when it comes to my pool of liquid assets. That’s the money I’m relying on for daily living expenses in the immediate future, and for any emergency spending. If I can’t get to it quickly, the inconvenience would be huge, and could be financially devastating. I might have to sell other assets at a loss.

When, a couple of years ago, I had $40K stolen out of my savings account at USAA, I was able to get right-through to senior, U.S.-based bank personnel and get the problem fixed within a few days. They were highly responsive throughout the entire process. There was never the slightest question about whether my account would be made whole. That’s the kind of service I expect when large sums are on deposit.

CDs

As I write this, rates for 1-year Certificates of Deposit (CDs) at online banks go as high as 2.7%. Sounds good, but CDs have always been a conundrum to me:

CDs aren’t perfectly liquid assets. You generally have to pay a penalty to withdraw your money before the term. Yes, sometimes that penalty is relatively small and can make sense when viewed as an “insurance premium” (see more below). But, at a minimum it’s a hurdle to getting your money, and in some scenarios it could be expensive.

There is an inherent conflict in my view between needing liquid assets, and being required to lock them up for a period of time to achieve higher rates. That requires a degree of certainty that I’ve rarely experienced in my life. I know there are scenarios, such as selling a house and wanting to earn higher rates on that cash for a few months while you relocate, or setting aside an inheritance for a large education expense a few years off, that call for CDs. It’s just that I’ve never experienced those scenarios.

Through early adulthood, marriage, child raising, empty nest, and early retirement, my situation has been more not knowing what the future would bring, and wanting a flexible pot of money available so I could handle anything that comes. My longer-term money, a few years out, has always been in stocks and bonds, and I’ve developed a comfort level with those markets. So I just haven’t seen the “sweet spot” for CDs, personally.

Finally, keeping money in CDs means more accounts and rules to keep track of. Since it would be impractical to keep all of your cash in a CD, it splits up your liquid assets into multiple pots. For many people, especially younger folks or those who enjoy optimizing every cent of their finances, this is no big deal. But for me, relatively late in the game, I’m trying to simplify my finances in every way possible, so they require less mental bandwidth for me — or my wife if I’m not here — to manage. Adding new accounts to manage our money takes us in the wrong direction.

Just to be sure, I researched buying traditional CDs through Schwab’s CD OneSource service. That’s potentially appealing, because I already have an account at Schwab and buying a CD is almost as straightforward as buying a mutual fund. But there is at least one catch: According to Schwab’s FAQs, if you need your funds before the CD matures, you aren’t dealing with a conventional withdrawal penalty stated up front. Rather, they will help you sell the CD at the current market rate by requesting bids and contacting you with the highest one. In other words, you’re stuck with auctioning off your CD in a potential fire sale. To me, that’s unacceptable for money intended to be an emergency cash reserve.

Bond Funds

Are bond funds a viable alternative for managing your ready cash? As I write this, the yield on Vanguard’s ultra-safe Short-Term Treasury bond fund (VFISX) is 2.66% and the yield on their Intermediate Treasury-Term bond fund (VFITX) is 2.89%. Those are appealing rates, somewhat above the available online savings accounts and more competitive with CDs.

But there are serious downsides: to start, your money is not FDIC insured. (Though there is minuscule chance of Treasury defaults, there is the slight possibility of custodial errors or fraud.)

Second, you are exposed to bond market volatility and interest-rate risk. “Duration” is the traditional measure of a bond fund’s sensitivity to interest rate movements. If a fund has a duration of 2 years, then its price would fall about 2% for every 1% that interest rates rise. The duration of VFISX as I write this is 2.3 years. For VFITX it’s 5.3 years.

Thus, even with these ultra-safe bond funds, you will see a hit to principal if interest rates rise, as they are currently doing. You must consider the total return of a bond fund, including any gain or loss of principal. Even though those risks are relatively small with intermediate, and especially short-term, bonds, they are present. It may be too much risk for money you need to tap in the next year or two. It is for me.

If you’re evaluating bond funds, you should know that at certain points in the economic cycle, CDs are demonstrably better. They can offer similar yields and lower risk, even taking into account early withdrawal penalties.

Allan Roth was one of the first to write about using CDs instead of bonds: “…rising rates can clobber bonds and bond funds, whereas CDs with small early withdrawal penalties offer intermediate-term yields with an insurance policy to escape if interest rates go up.” He further points out that banks are slow to match bond interest rate changes. That means when rates are declining, CD yields can be more attractive for a while relative to bonds. But when rates are increasing, it’s the opposite: Bank CD rates may lag bond rates. This is closer to the environment we find ourselves in now.

Last year, Mike Piper at Oblivious Investor wrote that he would consider replacing some bond funds for CDs. At times that could increase yield and decrease risk. But he notes the ongoing work involved: shopping for CD rates, and managing accounts across multiple providers. He concludes it’s a question of how much he’s willing to pay for the simplicity of an all-one-fund, in his case, versus breaking his investments apart into multiple, optimal holdings. And he came up with a cost of $690/annually for every $100K not invested in CDs.

Valuing My Time

Given all of these options, what did I do with my pile of cash? It’s not a slam-dunk that I would go for the highest-yielding solution. There are other factors. First the risk. Not just volatility, as with a bond fund, but the real risk of banking snafus or fraud preventing access to my cash. Then there is the value of my time.

A few years ago I wrote a post on the value of financial simplicity. I listed all the ways I’ve given up small amounts of money over the years to buy financial simplicity in my life. I noted that once you have enough money to make certain complex financial strategies worthwhile, you also might have better things to do with your time. For example, I have little interest in complicated tax schemes, including Roth conversions.

Recently I found a clever online tool for assigning an actual dollar value to your time. If you don’t have a handle on that number for yourself, take a few minutes to run through the analysis. You’ll get an invaluable data point for making financial and other decisions in your life….

It turns out that I value my time at about $300/hour, even in retirement, when I’ve long since given up a profession that might bill at such rates. Do I make that kind of money for the time I put in on this blog? Hardly. But writing a blog is work that I love, with long-term non-financial rewards. That $300/hour number is for work that I would be ambivalent about: such as researching bank rates, filling out new account paperwork, and sifting through communications from yet another financial institution. It reflects that, on the verge of my 60’s, I’m running short on time now, not money.

Also, when making financial decisions, it’s important to look at the absolute dollar amounts involved, not just percentages. Don’t be persuaded by apparently large differences in rates, unless the bottom line amounts would make a difference to you.

In my case, by investing more time and taking on more risk, I might be able to improve the return on my cash by about 1.5%/year. So, on $100K, I could get an extra $1,500 annually. That’s about 5 hours of my time. Is it worth it? It might not cost me an extra 5 hours every year to manage another account. But it would likely cost me several hours — if everything went smoothly. And I’m willing to charge off the rest to keeping our financial life simpler. So it’s a wash for me.

My Decision, for Now

For now, I’ve decided not to make any major changes to how I manage my cash.

I did move some money around so I get a higher rate on my Performance First Savings at USAA. That rate just increased slightly to pay 0.55% for daily balances between $50-100K.

I also opened a new High Yield Investor savings account at Schwab, where I already have brokerage and checking accounts. That effort got me a small increase in rate up to 0.45%. It’s a fraction of the return offered by the online banks, and not even competitive with USAA, but I’m hoping that they will increase their rates over time as yields keep climbing.

Most importantly, these changes didn’t add any overhead to my life. I already have long-standing relationships with ultra-reliable Schwab and USAA. For now, I’m resisting spreading my assets out further to an online bank. In fact, I’m trying to go the opposite direction. A decade from now, in my late 60’s, I’d like to be down to just a handful of accounts at just one or two institutions.

But, don’t get me wrong here. As always, I’m not saying what you should do. Many reading this will have different objectives and will make different time/money trade-offs.

And I’ve provided plenty of data and resources above if you want to follow another path with your cash.

Perhaps you’ve already had positive experiences with online banks. I’m interested in hearing your stories, good and bad, in the comments below. How do you optimize the return on your cash?

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Postscript: Following the extensive discussion below, I decided to move a substantial portion of my ready cash into Schwab’s Value Advantage Money Market Fund (SWVXX), currently paying 2.07%. It’s an option I had been dimly aware of, but hadn’t researched in depth. After thinking through my objectives, I decided it’s a good trade-off of return, risk, and time for me. One huge advantage is that I can simply buy it in my existing brokerage account at Schwab, no separate account required, and no fees. Also, Schwab offers next-day access on any sales. (One of the many rewards of writing a financial blog, is that readers are collectively smarter and better informed than I could ever be alone. Thanks to MrFireby2023 for the helpful suggestion!)

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