Wednesday, December 9, 2009

Your Cash Stash

Before even thinking about investing, you should have some cash stashed safely away for unexpected expenses and expenses planned for the next 1-2 years.  Common advice is to have 3-6 months of living expenses in cash for emergency reserves, but the actual amount depends on many variables; e.g., job/income stability, other sources of funds, likelihood of various unexpected events occuring, planned expenses, etc.  Once you've given it some thought, and decided on how much you want to allocate to your cash reserves, you have to decide where to keep the cash.

Typical instruments to use for parking cash reserves are money markets, FDIC insured checking or savings accounts, short term FDIC insured CDs, and perhaps treasury bills.  A couple of years ago, I was using CDs, money market funds, and treasury bills, and getting around 5% interest.  However, rates have plummeted, and money markets now are paying less than 0.2%, and short term CDs are paying only a fraction of a percent.  Of course, inflation as measured by the CPI has been basically 0 lately, so in inflation adjusted terms, interest rates close to 0 aren't as bad as they seem.  However, you can do better, at least outside of a tax-deferred account (where your options are limited), and you normally don't want to use your tax deferred account for your cash reserves anyway.

The best deals I've found lately for short term cash reserves up to $25,000, outside of a tax-deferred account, are FDIC insured rewards checking accounts.  These accounts pay up to 4% or more on balances up to some limit (anywhere from $10,000 to $50,000, but typically around $25,000) as long as certain criteria are met.  The criteria are generally making 10 or 12 debit card purchases, having 1 electronic deposit or withdrawal, and using only electronic banking (no paper statements).  The best source I know of to find out about the current rewards checking account deals is  The website has recently changed, and I haven't experimented with it yet, but it still looks like it lists good rewards checking accounts that are available nationwide.

Applying for any new account can be a bit of a hassle, and you'll need to make sure you will do the required debit card purchases and set up the required automatic deposit or withdrawal (e.g., have your check auto-deposited or pay one of your bills automatically).  Also, the incremental interest you get may not seem like a lot, but to help motivate you, let me illustrate the difference it can make over a lifetime of saving and investing.

A handy shortcut to figuring out how long it will take for your money to double is the rule of 72.  Divide the interest rate you're getting into 72, and that's approximately how long it will take to double your money.  Simple examples: if you're getting 7.2%, it will take approximately 10 years to double your money.  If you're getting 10%, 7.2 years.  At 5%, 14.4 years (twice the time for 10%).  Now, let's use the rule of 72 to see how taking the time and hassle to set up and use a rewards checking account (or whatever else can get you a bit more interest) can benefit you over the years.

At 4%, it will take about 72/4 = 18 years to double your money.  Let's say you maintain an average cash reserve of $10,000.  At 4% it'll be worth $20,000 after 18 years, $40,000 after 36 years and $80,000 after 54 years.  If you're 25 or 30 years old, your investing and savings timeframe (at least what you should plan on) is at least 54 years (unless you have some serious health problems or other reasons you expect to die at a younger than average age).

However, at 1%, it'll take about 72 years to double your money, so it's likely that your $10,000 earning 1% won't even be worth $18,000 before you die.  So, an extra 3% could mean more than $60,000 extra in lifetime interest earnings.  Of course you're not even getting 1% now in most bank accounts or money market accounts.

Of course these examples aren't inflation adjusted, but inflation is even more reason to put a little extra effort into getting a higher yield on your cash.

If you have more than $25,000 in cash reserves, then the next best deals that are generally available are online savings accounts, which are typically paying about 1.5% now.  There may be better sites, but I've used to find the best rates for online savings accounts; I see rates up to 1.7% there now.  Also, rewards checking accounts generally pay about 1% on amounts over the cap, but if you're lucky, you may find one that pays almost as much as an online savings account on amounts over the cap.

If you find better places to park your short term cash reserves, please share them in a comment!


  1. Thanks for the information Dad! This will really help me as I start making money. Do the rewards checking accounts only work if you have at least $25,000 as your cash stash?
    I never knew about the rule of 72...very helpful! :)

  2. Good question (about minimums for rewards checking). I'm usually more concerned about the cap than the minimums, but generally the minimums are $100 or less. Click on the link I provided to find out more about rewards checking accounts, then click on a few to see the details.

    Yeah, the rule of 72, widely written about by financial authors, is a handy shortcut to get a feel for the impact of various interest rates.

  3. Kevin! It's Adam, Scott Brown's son. Megan and I have had money in AMEX's online savings account at 1.3% thinking we were getting the highest return possible. I had no idea a 4% cash return was out there these days! How reliable/trustworhty are these smaller online banks? I was looking into possibly using Evantage.

  4. Hey Adam,

    Yep, if you're willing to meet the requirements, a reward checking account is your best bet for limited amounts of cash.

    My experience with online banks has been excellent. The best thing to do to evaluate the banks offering reward checking is to read the reviews on As long as your deposits are FDIC or NCUA insured, your money is safe.

    Note that the rates and balance caps can change. I see that Evantage is dropping their rate to 3.75%, which is still quite good these days.