Where Should You Keep Your Cash Savings?

What’s the best place to store your cash—a bank? A life insurance policy? Money market account? Your mattress?

First, let’s clarify what I mean by “storing cash.” I’m talking about liquidity or the savingsportion of your personal economy. As I explain in this Money Myth video, saving is not the same as investing!

Through investing, we either grow our money or create cash flow with it. Investments typically tie our money up for a period of months, years, even decades while the goal of growth or cash flow is achieved.

The aim of saving, in contrast, is to increase our liquidity so that we have money available to us that we can use when needed, for things such as:

• Emergencies such as unexpected unemployment or a new roof
• Major expenses such as a car, a wedding, college tuition, or a home remodel
• Investments, such as a first deed of trust note on a property, a life settlement fund, or a down payment on a rental home
• Business expenses, such as start-up costs, equipment leases, and building inventory.

So when looking for the best place—or places, as the case may be—to keep your cash, it’s important to understand what you want it to do with it and how soon you’ll be using it. You’ll also want to make sure your chosen financial vehicle meets certain requirements. At minimum, your cash storage solution should be:

• safe and secure
• accessible when needed
• affordable (not drained by fees)
• tax and penalty-free (which is why we don’t include IRAs and other qualified retirement account in this discussion, they are a terrible place for cash/savings), and
• earning interest to combat the effects of inflation.

Let’s look at common cash storage solutions and see if they are good places to store cash. Keep in mind, you’ll likely need multiple solutions, depending on whether you’re storing cash long-term or just until you go shopping tomorrow or pay your next round of monthly bills.

A Bank (or Credit Union) Account

The huge advantage of bank accounts is convenience. You need a way to conduct everyday transactions with debit cards, ATMs, and checks, and your local bank or an online bank or credit union is one logical solution.

Affordability can vary; many banks waive monthly fees if you do direct deposit or maintain a minimum balance. If you are currently paying a fee for a checking account, shop around.

It’s typically assumed that safety is the other big advantage of banks. After all, FDIC insurance guarantees accounts up to $250,000, right? But banks might not be quite as safe as you think. It is actually quite common for accounts to be hacked and, although you can get your money back, it’s a hassle.

Perhaps more importantly, understand that banks themselves have limited liquidity. If you need a large sum of cash quickly, often times your bank cannot give it to you! We think it is reasonable to keep some cash on hand, enough to get you through perhaps a few weeks if some sort of emergency or natural disaster ever unexpectedly causes bank closures. And understand, if there is ever a large-scale financial crisis that creates a run on the banks, banks will come up short. We’ve done the math and it’s ugly. Due to fractional-reserve banking (our US banking system which allows banks to lend out many times more than they take in through deposits), banks only have pennies on the dollar.

Government policy has also changed since the Financial Crisis. In case of a severe future crisis, some have predicted a bank “bail in,” which would force depositors to share losses, similar to what happens to creditors in a bankruptcy. This strategy was employed in Cypress, and according to a May 3, 2013, article on Forbes.com, “Despite early denials, the ‘bail-in’ strategy for insolvent banks has already become official policy throughout Europe and internationally as well.”

If you owe any unresolved debts and have any judgments against you, even from years past, know that your money is not safe in a bank! Creditors can and do drain bank accounts all the time; we’ve seen it happen to clients. If there is a judgment against you, contact the creditor to pay it or negotiate a solution. (Then there is the issue of civil asset forfeiture… but that’s another article for another day.)

As far as earnings go, most banks really fail here. Savings accounts at Bank of America today are paying .01%—that’s 1% of 1%! Oh, and those extra pennies you earn will be taxable.

If you do have lump sums of cash that you must park somewhere temporarily, consider online banks with lower overhead such as Ally.com, which is currently offering savings accounts at 1.15% and no fees or minimums.

The bottom line: By all means, utilize a bank or credit union for your everyday shopping and bill-paying, but watch your fees, be aware of potential risks, and realize that banks are not a good long-term solution for growing and storing large amounts of cash.

Certificates of Deposit

Bank CDs are a popular solution for cash. The main advantage is that bank CDs typically pay more than savings accounts. But they still don’t pay very well—currently about 1.5% at the most competitive banks, and as little as .15% at major banks for a multi-year commitment! (Yes, taxable.)

And what happens if you want to use your money before the end of the CD term? You’ll be penalized, of course. Some people set up “CD ladders” with different expiration dates, but that still subjects your dollars to low rates and a lack of flexibility. We prefer savings solutions that give you more control. After all, the whole point of saving is to have the liquidity to use when you need it!

Then there are the other disadvantages of keeping money at a bank, which we outlined above.

The bottom line: If you have cash that you wish to use in the future, but you need to park it for a year or more, forget bank CDs. You’re much better off acting as a private lender (for instance, financing a short-term bridge loan secured with a first position deed of trust), where you can earn 7% or more.

Money Market Accounts or Funds

A money market account from a bank or a brokerage can pay better than a savings account and can also give you check-writing privileges (which many savings accounts have, too.) Plus they are FDIC insured.

However, as we write this in 2017, the rates are terrible, as they have been for some time. Major banks such as Bank of America are paying a measly .03% (3% of 1%). And unless you maintain a minimum daily balance of $2500, you’ll pay a $12 per month fee! So if you used a money market account to store $1000, you’d be in the red by the end of the 7th year.

Bank of America Money Market Account            

Earning .03% with a $12/mo fee :

Online banks such as Ally Banks are paying .85% with no fee, which can make it a pretty good checking account alternative. (You’re still not keeping pace with inflation, but we prefer gains to losses!)

Ally Bank Money Market Account

Earning .85% with no monthly fee:

The bottom line: Money market accounts aren’t a good place to save, but as a checking account alternative that avoids 0% returns and bank fees, they can be a win.

Life Insurance Cash Value

As a long-term savings strategy, whole life insurance policy provides compelling benefits over the typical cash vehicles above.

Life insurance cash value is one of the few safe money assets that allows your savings to keep pace with or even exceed inflation. Over time, we see policies reflecting growth rates of about 3-5%, depending on factors such as age and health of the insured. (In past decades when higher interest rates prevailed, we saw growth rates of 8% or higher, so the rate environment is low right now everywhere.) Cash value is contractually guaranteed to grow each year, and for over 150 years, mutual insurance companies have additionally paid dividends every single year.

As far as safety, highly-rated life insurance companies are well capitalized, compared with banks, which only have to keep a small portion of their deposits on hand. (See “How Liquid Is the Life Insurance Industry?”) There has even been a significant trend of major banks using life insurance cash value to beef up their tier one assets to ensure their own liquidity. (See “The Banker’s Bunker,” Part 1 and Part 2.)

As far as security and privacy, whole life cash value provides tremendous benefits over banks. We’ve never heard of a creditor forcing an insurance company to hand over your money (although the protections against creditors vary state to state.)

What you won’t get is the convenience of checking accounts and such. There’s no ATM card—and also no security breaches.

As mentioned, this is a long-term saving strategy. In the first few years of a policy, the cash value will be less than total premiums paid, due to internal costs, then in later years, policies demonstrate gains often exceeding inflation. So be aware, if your main goal is to save for a major expense coming soon—such as college tuition for your 16-year-old—it’s probably a little late to start a policy for that purpose. But let’s examine what you get for these internal costs…

First, permanent life insurance acts an instant “net worth multiplier” in a way that other cash equivalents can’t. A guaranteed permanent death benefit is put into place immediately which protects your income and makes the policy a “self-funding” savings plan that protects against the death of the insured. So if your goal is to guarantee there will be a college fund for your 6-year old, regardless of what happens to you or the stock market, saving with whole life could make perfect sense (especially if you intend to maximize financial aid).

Then, depending on the specific riders selected, a policy can include disability protection, long-term care benefits, and clauses that allow you, if you are the insured, to receive a portion of your death benefit if you are diagnosed with a terminal or critical illness. This can strengthen your overall financial strategy by allowing you to reduce or eliminating payments for long-term care and term life insurance, giving you more money to save. And when death benefits or accelerated benefits are factored in, the rate of return of a policy can easily be 6-8%.

Then there are the tax benefits. Cash value grows tax-deferred within the policy, and remains tax-free as long as the policy is in place. Death benefits to beneficiaries are often tax-free, which can make an enormous difference in one’s ability to pass wealth to children and grandchildren with minimal interference by Uncle Sam.

And while you can always withdraw cash value, for most people, tax-free policy loans or even bank loans (using your cash value as collateral) are often the preferred way to access cash when needed. Your cash value remains in the policy earning interest in either case.

The bottom line: When considering a long-term saving solution for emergencies, opportunities, personal or business liquidity, and passing wealth to future generations, we know of no better place to put your cash than whole life cash value.

If you would like to see an illustration on how a policy might perform for you—the guaranteed growth and expected dividends (not guaranteed but historically reliable), contact us today.

And for further information, I invite you to pick up a copy of Live Your Life Insurance —a perfect primer—or Busting the Life Insurance Lies, a more detailed book, on Amazon.

And be sure to sign up for our Prosperity Accelerator Pack to receive a complimentary ebook, Financial Planning Has Failed, which explains how you can build wealth without the risks inherent in the stock market or the big banks!