Do You Have Money Falling Through the Cracks?
About the author: Jeff Martin is a financial advisor at Cornerstone based in Reno, NV. He enjoys being able to help clients create customized strategies for their portfolios based on their unique financial goals.
Do You Have Money Falling Through the Cracks?
Saving and accumulating assets is no easy task. It takes hard work, discipline and sacrifice. Once fruits of this labor begin to show, the work is not over. In fact, it is just beginning. There is an abundance of ways, whether realized or not, to let those hard-earned dollars fall through the cracks. One may argue that ignorance is bliss, yet, would that same person not stop to pick up a $100 bill if they were to see one on the sidewalk? Generally, not. Of course, doing the right thing and making efforts to get the $100 bill back to its rightful owner is implied, but you get the idea. Let’s take a simple, yet common oversight. Cash.
I was fortunate enough to have a great conversation with a client regarding some “lazy cash”, and what they were trying to accomplish with it. Don’t get me wrong, having an established, safe, liquid, and accessible savings is the financially prudent thing to do, but when does it become too much? This differs from situation to situation as well as personal preference and comfort zones. This client had their savings established, but also had a cash surplus from regular monthly saving, and an upcoming escrow closing on a property which would be held in their previous brokerage sweep account. Given the overall environment, they felt more comfortable keeping more cash for the time being and wanted to discuss some options. They were not overly excited about the yield on their previous brokerage sweep account as it was next to nothing. This is a prime example of one of the many ways one may think they are making beneficial, prudent financial decisions, yet without having all the facts, or knowing what questions to ask, ultimately could lead to money falling through the cracks.
It is undeniable that we have been in a low interest rate environment. Rates have been coming down for nearly four decades. The financial crisis absolutely accentuated this. So now, as rates are beginning to climb, where do you put your cash?
Cash, money market, sweep accounts, all the same thing, right? Wrong. For instance, if we were to hop in our time machine, and take a quick jaunt back to 2008, we may be able to remind ourselves of a valuable lesson, that was learned the hard way for many. The financial crisis of 2007-2009 was a very challenging time to say the least for many people. Often challenges and discomfort lead to creating learning opportunities. This would be no different. During this period, many people thought their money market funds were comprised of stacks of cold, greenback U.S dollars safely held in a vault with no risk. Unfortunately, this was not the case. Some of these funds changed their makeup and were investing in securities, and not being held in risk free cash vehicles. Which due to the collapse, were able to lose value. This is called “breaking the buck”.
Sweep accounts are a very common tool when it comes to brokerage accounts. This is generally described as a “cash account”, true, to a degree. Our interest rate environment has posed many challenges, and it is still being felt here. Rates are slowly starting to climb, but near zero interest rates are far from gone. Especially when it comes to sweep accounts. This tends to be an appropriate cash tool to utilize, if your intent is to add to that brokerage firms bottom line instead of your own.
CD’s generally pop up in this conversation rather quickly. Another example of some of these cracks for your money to fall through widening could be a longer-term CD (IE 12+ months). The reported inflation for 2019 is 1.8%. Let’s take for example, you find a promotional CD in the 1.5%-1.75% range, what has been accomplished? You may have found a way to safely lose 0.1-0.3% on your money. Potentially more as rates continue to climb. Do CD’s have a purpose and serve a function? Yes. In some situations, does their application make sense? Also, yes. Yet, we tend to see longer term CD’s under-perform in relation to inflation, which causes an erosion on the buying power of your hard-earned dollars.
You may be wondering to yourself what options are left and make sense for your particular situation. We, as people, tend to run to the solution and skip a few steps, often allowing us to make the same mistakes over and over again. I would encourage you to think about it differently. Was a component of previous regrettable decisions not having all the relevant information, or possibly not knowing what questions to even begin with? Without having a functioning crystal ball that allows you to see into the future, we are left with making decisions based on the information we know and using the circumstances at that point. Yet, we can add to this disadvantage by only utilizing “some” of the information, or perhaps not having the conversation with someone who is able to provide advice that is in your best interest. There are ample opportunities to allow your money to fall through cracks, I would encourage you to use your resources, and trusted, relationships to help shrink or alleviate those cracks as much as possible.