Women's Retirement Radio

Russ Thornton - How Much Cash and Where to Keep It? - Episode 54

February 21, 2022 Russ Thornton Season 3 Episode 8
Women's Retirement Radio
Russ Thornton - How Much Cash and Where to Keep It? - Episode 54
Show Notes Transcript

In this episode of Women's Retirement Radio, I want to cover how much cash (liquid savings) you should keep and where you should keep it.

Should you use a big brick & mortar bank with a branch on every corner or an online bank? What are the pros and cons of each?

And how much liquid savings should you hold on to in the face of rising inflation?

I address these questions and much more in this short episode.

Get in touch and let me know what you think or if you have any questions.

And thank you for listening.

Visit my website to learn more.

And you can also check out this episode on on my YouTube channel.

Disclosures

Russ Thornton:
Hi, there, it's Russ, and welcome to another episode of Women's Retirement Radio. Today, I am looking forward to sharing my thoughts on cash, cash management, checking, savings, things of that nature. I've been having a lot of conversations with clients lately, and that's a topic that's been coming up quite a bit, especially in the face of rising inflation. So, first of all, let's start with, how much do you want to keep in your cash or savings? My personal rule of thumb is start with your monthly expenses. So if, in an average month, you spend, say, $3,000, I would recommend keeping, at a minimum, three months of expenses in a liquid, safe savings account, where you can get at it easily and quickly should the need arise. So if you spend, on average, $3,000 a month, three months of that would be $9,000. A safer and better place to be, if you can afford it or work towards it, would be six months of savings. So at $3,000 a month, that would be $18,000 of savings that you would keep safe, liquid, and available.

Russ Thornton:
And for those of you that perhaps work in a job or career where your income is less stable, so perhaps you work in sales, you rely on commissions, or you're in an industry where there's a lot of turnover, so maybe you don't have quite the job security that some of your other friends and family might have, then you might consider upping that to 12 or even 18 months worth of expenses because in the event that you were to go through a dry spell with earnings or commissions, or in the event that you were to lose your job or get recruited away and there might be a period of no earnings between jobs, it would be good to have some extra liquidity available for you. So that's an exception to the rule, if you will. So just in review, I would shoot for a minimum of three months worth of expenses. Six months is a great target. And then depending on your personal situation, the stability of your earnings, and the stability of the industry in which you work, or if you're self-employed or own a business, you might consider bumping that up to 12 or maybe even 18 months worth of expenses in a safe, liquid savings account.

Russ Thornton:
The other thing I want to point out is my five-year rule, and this isn't a rule I invented, but it's something that I've believed and adhered to for the majority of my career. And that is if you have an expense coming up in the next five years that you anticipate, I would not get the money for that expense anywhere near the investment markets. Keep that money safe, keep it liquid. Even if you're only earning a fraction of percent, it's better to have that money available when you need it, as opposed to expose it to investment market risks and potentially see the value of that money decrease at the worst possible time or when you need the money to spend on your anticipated expense. So that's my five-year rule, something to think about.

Russ Thornton:
What about if you have credit card debt? Well, I would prioritize getting rid of your credit card debt, but don't think of it as an either/or. I don't think of it as pay off the credit card debt and then build your savings, nor do I think of it as build your savings, then pay off the credit card debt. Instead, I would encourage you to think of it as doing both at the same time. So if, for example, your monthly bill for your credit card is $100, that's probably the minimum payment. I would encourage you to pay more than that, so you can start actually paying down the principle of the loan on the credit card. But if you could do that while also putting some money in your savings to build that up, all the better, because the worst-possible thing that could happen is you get your credit card paid off, but then you don't have any cash savings and an emergency or an unanticipated expense pops up and then you have to go right back into credit card debt. So I would encourage you to think of doing both at the same time, to the extent that you're willing and able.

Russ Thornton:
Same situation with your 401(k) at work. So many companies offer a 401(k) which include a company match. I would encourage everyone listening to this to at least do everything you possibly can to put in the minimum amount necessary to capture the full company match. Otherwise, you're leaving basically additional compensation on the table, but that does not mean you should do that in exclusion of setting aside savings and building up your emergency fund. An emergency fund is just a loose term that I think of when I'm talking about building up that six months plus or minus of expenses in a safe, liquid savings account. So those are just some high-level thoughts.

Russ Thornton:
The question that inevitably comes up next is, "Okay, so I need to set this money aside. I need to have six or more months of expenses in a safe savings account. Where is the best place to put that?" And so, as you can imagine, you have a lot of choices. My personal recommendation is to consider alternatives other than the big, traditional brick-and-mortar banks. And before I go any further, let me be clear, I don't have a business relationship with any of these companies. And you need to make the decision that's going to be best for your personal situation, recognizing, of course, that everybody's going to have circumstances that might dictate that they do something different than what I would do, for example.

Russ Thornton:
But in the case of Bank of America, they offer... I'm on their website. As you can see, they offer three different checking accounts. One of my first questions is, "Why do they offer three? Why not just one?" And I recognize that they're offering three to maybe cater to different people at different stages of their life. But if you scroll down here, two of them, they don't offer any interest on your checking account balances. And for this one over on the far right, they'll pay you 1/100th of a percent on balances up to $50,000. And I would imagine most of you keep probably less than $50,000 in your checking account. To put those in dollar terms, that's going to be, I guess, about $50. I'm sorry, not even $5 a year on $50,000 of balances, so not a whole lot of interest. And the other thing I would encourage you to ask yourself, too, is in the last couple of years, especially in the face of the Coronavirus Pandemic, how often have you even walked into a bank branch, or have you walked into a bank branch in the last five years? Inevitably, some of you have. Many of you haven't. So I would, again, question the need to have a brick-and-mortar bank with physical bank branches, because those bank branches cost money and those costs get passed onto you in lower interest payments on your balances.

Russ Thornton:
Another example is Wells Fargo. Again, they also have three different checking options. And if you scroll down here, they do not offer any interest on two of their three checking account options. And I've looked high and low, I cannot find, on Wells Fargo's website, or at least not very easily, how much interest they do pay on this one checking account option. But I would imagine it's probably going to be similar to what you would get through Bank of America, probably a 100 to 1%.

Russ Thornton:
Here is Synovus. Synovus is based in Columbus, I believe, and I know a lot of my clients have relationships with them. Again, Synovus pays little to nothing in the way of interest. Same thing with Regions Bank regions offers actually six different checking accounts, which I don't understand exactly why that's the case, but they do not pay interest on any but one. And if I pull up local rates and search based on my geography, they pay, even if you have $100,000 or more, they pay 1/100 and 1%. So again, I'm not badmouthing these institutions. They've been around a long time, they have a lot of customers, they take good care of them, but I would encourage you to consider your options and maybe think about non-traditional solutions to managing your checking and/or savings.

Russ Thornton:
With that in mind, one option you might consider is Ally, which is ally.com. I've got them up on the screen here. They have no minimums, very little fees, and they pay 1/10th of 1%. So now they're already paying 10 times what you would get at Bank of America, Wells Fargo, or Regions for balances of up to 15,000. And if you need or want to keep more than $15,000 in your checking... And this is checking, by the way, not savings... they'll actually pay you a quarter of a percent of interest. The fees they do charge for overdrafts and stop payments are pretty minimal, and they, frankly, don't have a ton of fees to begin with, as you can see here. They don't charge maintenance fees, which many of the big banks do, unless you jump through some hoops or meet their requirements, overdrafts, things like that. So they're in my opinion, a much better option. Another to consider is Capital One. They have a 360 checking account, no fees, no minimums, and after doing a little digging on their site, it looks like they pay... As you can see on this screen, they pay 1/10th of 1%, pretty much on all balances. So that's an option as well.

Russ Thornton:
So regardless of where you do your banking, the first thing I would encourage you to do you is use a company or institution that you're comfortable with because at the end of the day, you need to be able to sleep well at night and not be concerned about who is taking care of your money. But I would also encourage you to at least consider the variety of options to include some of the non-traditional or online banks, like an Ally, like a Capital One, and there are others out there as well.

Russ Thornton:
That's checking. For savings, you might also look at your options there. Many of the big banks, and I didn't pull up each of their websites for their savings accounts, but they offer, again, next to nothing on savings balances, maybe one- or two-hundredths of 1%. Another option that I encourage a lot of people to use and, in fact, I have an account with them myself, is American Express personal savings. They have no fees, no minimums, and they currently, as you can see on the website here, are paying half a percent of interest. And the way that works is you set up an account online, connect it electronically to your checking account, regardless of which bank you use, and then you can move money to and from as you see fit or as you want to earn some additional interest on your savings account balances. Ally also has a savings account. They also, as you can see here on the screen, on the bottom left, they pay a half a percent interest. And you can see here, this is Ally's website, so clearly it's a little biased, but they show compared to Bank of America, Chase, and Wells Fargo... Each of those three institutions, they claim, pays 1/100th of a percent on savings, so you're getting literally 50 times the interest with a savings account at Ally.

Russ Thornton:
And finally, Capital One offers a savings account where they pay 0.4% or four-tenths of a percent on all balances. Again, no minimums, no fees. So the takeaway from this short message is to, first of all, make sure that you keep enough in liquid savings or in an emergency fund, if that's how you like to think of it, but at the same time, I would encourage you not to keep too much. And once you figure out what that number is for you, think about the best place to house that money, first and foremost, to keep it safe, to keep it FDIC insured, and to make sure that it's there when you need it. But beyond that, consider whether or not you're getting any benefits, interest, and any other flexibility based on the institution that you choose to work with. So just some food for thought.

Russ Thornton:
I didn't get into credit unions today. I know a lot of you work with credit unions. Those are also a good option, although, in my limited experience looking at credit unions, which I've never worked with one personally, they typically pay interest more along the lines of what you would get from a big bank. There may be exceptions, so reach out and let me know if I'm missing something there. But anyway, hope this has been helpful. If you have any questions, reach out and let me know. Again, this has been Russ, and this is Women's Retirement Radio. Look forward to catching up with you again on the next episode.