How to Structure Your Cash to Earn More Without Taking Risk

Cash management is one of the most overlooked parts of a financial plan, and it costs people more than they realize. From what I see, investors hold their cash one of three ways, and all three have a problem. Here is how I think about it, and how I structure it for clients instead.

The three usual spots, and what is wrong with each

The first is a checking account, where you are practically paying the bank to hold your money. They pay you close to zero, then turn around and lend it out at 4, 5, 6% or more. The second is a CD. It is FDIC insured, but the big issue is liquidity. If you need your principal back early, you pay breakage fees to get it. The third is a high-yield savings account, also FDIC insured, but the catch there is that as short-term rates come down, so does your yield. You do not control it.

Why I do not lean on FDIC insurance

Honestly, my opinion is that FDIC insurance is close to worthless. Banks rarely go under, but when real systemic problems hit, that is exactly when it matters. Silicon Valley Bank, First Republic, and Credit Suisse all went under, and the FDIC did not have enough to cover the deposits. The government stepped in and guaranteed everything anyway. So the largest insurer in the country is really the US government. That is exactly why, as long as it is structured properly, I think there is no better place for cash than US Treasuries.

Structuring cash in buckets

I tell clients to think about cash in three buckets. Operational cash is what you need in the next zero to six months. Strategic cash covers six to twelve months. Opportunistic cash is money you will not need within twelve months. Splitting it this way lets me maximize what we can safely earn in Treasuries across each time frame. A lot of people simply do not know how much cash they should be holding, and figuring that out is part of the liquidity planning I do here.

The waterfall

Here is how it works in practice. Say an expense comes up that you were not planning for. You pull from the zero to six month bucket, then refill that from the six to twelve month bucket, and refill that one from the twelve month plus bucket. It works in the other direction too, almost like a waterfall and a reverse waterfall. The result is a structured cash portfolio that stays liquid, earns somewhere around 4.5%, and does not require taking on much risk.