Cash is Trash

Cash is king! It’s a well known saying, but is it true? If you are a bank or other financial institution happily paying a meager amount of interest on savings, while reaping higher rewards by investing that same money into higher interest rate securities, or loaning it and collecting the interest, the answer is a resounding “yes!”. For you, cash is trash (a phrase famously uttered by a Vestory advisor some years ago).

I have no argument with having money you can access quickly. There is no question that you should have an emergency fund.  Depending on your situation, it makes sense to have 3 to 6 months of living expenses set aside. Loss of earnings, an emergency or any other unexpected need means you should have money at the ready.  But, beyond that, there is really no reason to have cash as part of your asset allocation.

You may ask: Why do I care? As a longtime financial advisor, I see significant cash holdings as a huge problem. It’s estimated that banks hold about 8.5 trillion dollars in cash, which is terrific for the banks (see above).  Meanwhile, you, the client are losing to inflation.  That is, you are losing money “safely”; the rising cost of living is making your cash worth less every day.  And probably faster than you think.  Remember, inflation has averaged about 3% a year since the 1930s (and closer to 4% a year for the last 35 years).  Your inefficiency makes millions of dollars for others while costing you a pretty penny.

As you consider whether to have cash as a large part of your holdings think of this: what is your cash paying you?  If you are a shopper and willing to switch banks, you can find decent deals on short term money.  According to, PNC bank is paying 2.35% a year in interest, with no fees, no minimums. Always check the fine print on deals that are so outsized from the more prominent banks.  For example, Bank of America is paying between a paltry 0.03% annual percentage yield (APY) and 0.75% APY, depending on term length and deposit amount. While some checking and savings accounts have experienced mild increases in interest rates the past few years, the amount you earn is still very low compared to inflation. But, if you want to stay “liquid” but earn a bit more interest, there are a couple of alternatives.

As interest rates have slightly increased, you can now get ‘reasonable” rates of return from Certificates of Deposit and bond mutual funds. For cash holdings consider a CD ladder. You could buy 1-year, 2-year, and 3-year CDs.  Interest on the length of the CD varies, of course, but if you shop you can earn between 2% and 3%.  As each CD matures, you can use the cash as needed, or buy a new CD, keeping the ladder. If this sounds like too much work, perhaps a bond fund would be easier.

For simplicity, you could buy the Vanguard Intermediate-Term Treasury ETF.  The current SEC yield is 2.32%, a bit less than you would earn using a CD ladder. And you face the risk of loss when bond prices decrease as rates rise.  I favor this strategy as it’s simple, easy to manage and more liquid than the CD ladder.

Cash is considered “king” of investment tools.  However, thoughtful investors should keep cash to a minimum and properly invest their money into more productive assets. The reality is that maintaining liquidity is rewarding those institutions who hold it for you and keeping you from being adequately compensated for saving.

Tom CockComment