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Written by: Mike Eklund
If paying attention to the news cycle lately, you may be wondering if your cash is safe. Watching the country’s 16th largest bank collapse has caused people to question whether their cash at the bank will be there when they need it.
In this episode, we’ll discuss what happened to Silicon Valley Bank, examine how much cash you really need, and explore options for managing the cash assets in your portfolio.
Is your cash safe?
To understand how this event unfolded, you can first look at the typical Silicon Valley Bank customer which consisted of tech companies and venture capital investors. What ultimately resulted in a digital bank run, was started when these tech companies & investors began to withdraw funds rapidly and all at once.
In these scenarios, we’re reminded that banks make money by loaning customer deposits in short to long-term holdings. So if all depositors request their savings at once, banks become forced to sell their holdings, potentially at a loss to meet the deposit demands.
In this case, SVB invested its customers’ funds by buying long-term treasury bonds and mortgage-backed bonds. Then, when SVB customers withdrew around $42 billion in one day, the bank had to sell their longer-term bonds at a loss due to a rapid rise in interest rates over the last year. Many experts argue this is a unique situation in that the management team at SVB mismanaged their customer deposits by investing long-term treasuries/mortgage bonds. Additional information can be found here.
The good news is that the federal government has guaranteed the SVB deposits. The FDIC insures bank accounts up to $250,000 per account owner. While it is important to understand that your cash is safe in your bank account, the same does not apply to funds invested in securities.
How much cash do you really need?
The best answer is determined in a customized and personalized written financial plan, but ideally, everyone should have access to emergency funds. This amount will vary depending on your income, goals, existing savings, and stage of life. A good rule of thumb is to have 3-6 months of expenses set aside, but the specific amount, depends on the timeline of when you’ll need those funds and size of your brokerage fund.
A financial advisor can help you analyze your situation and help you come up with an appropriate financial plan and decide how much and where to stash your short-term savings.
How to manage your cash savings
Once you decide how much you need to have set aside for emergencies you can decide where to save your money. There are four common places to store your funds.
- Savings account – On the plus side, a savings account offers easy access to your funds. However, interest rates are lower, so your money may lose value over time.
- CDs – CDs offer higher interest rates and they’re easy to set up. CDs are invested for a set period of time–typically 3, 6, or 12 months. On the downside, there are fees for early withdrawal and you also have to decide what to do when the time period is up.
- Treasury bills – Treasury bills have better interest rates than CDs. Setting one up can be challenging to do on your own if you deal directly with the government or your custodian. On the plus side, they aren’t subject to state income taxes.
- Short-term bond fund – If you have a longer time frame before you need to access your emergency cash, you may want to consider a short-term bond fund. They typically mature in one or two years. Your cash may not be available immediately; it could take one to three business days to access. You may also struggle to see the values change on a daily basis.
If you have been wondering what to do with cash that’s earning lower than average interest rates, reach out to a financial advisor. There are so many layers to work through. An advisor can help you understand your cash flow, net worth, and even help you plan your estate. Helping you think through all your options can help you best understand how to invest for the short and long term.