Everything has Risk, Even Your Cash!

November 6th, 2020 by Tanner Wrisley

What is the least risky asset one can hold? Many people assume that cash is safest because the dollar is our baseline, its how we measure the value of everything else. And yes, cash is generally one of the safest investments out there, but it still holds risk. This article will go over the different types of risks associated with assets that people generally assume cannot lose value.

Cold Hard Cash

If you have a million dollars stashed away under your mattress, that cash has risk. It can lose value from a number of different ways. Many people consider cash to be the safest investment – I am here to tell you it’s not.

  • First, let’s start with the one you may have heard of already, inflation.
    • As our economy progresses, the price of goods and services as well as people’s incomes have tended to grow at about 2% on average. That $4 gallon of milk last year, suddenly costs $4.08 this year. But your salary of $50k also got bumped to $51k.
    • Meanwhile, the cash sitting at home is losing “buying power” because it is still valued at $1 million dollars. Last year, you could have purchased 250,000 gallons of milk whereas now you can only buy 245,098 gallons of milk!
    • Okay, nobody is buying that much milk, except maybe ice cream parlors. But you can apply that same logic across all of your expenses throughout the year.

Inflation is the easiest and most common way to lose value from your cash, but there are other, less likely ways as well.

  • Someone finding it and stealing it is another way to lose that value.
    • Although this is not very likely, it does happen. And, if your money is not in some sort of a financial account with electronic records, there may be no way to get it back.
  • There is also, however unlikely, the chance that the U.S. dollar goes kaput.
    • Our dollar is not backed by anything. It has value because the government says it does and people are willing to accept dollars as a form of payment.
    • If people were to lose confidence in the dollar or stop accepting it as payment, you could lose value that way as well.
    • Some conspiracy theorists think the dollar will at some point go completely under and crypto-currencies will become the new currency for all. This seems highly unlikely, but I would say, having all virtual currency would be pretty convenient, especially in a pandemic. I couldn’t tell you when the last time I paid with cash actually was.


Checking Accounts

Let’s say you took that million dollars and deposited it into a checking account with a bank. This seems safer than hiding it somewhere in your home, and in a lot of ways, it is safer. It is definitely harder to steal, even if someone robbed the local bank you deposited your money with, your account should be fine. It would be the bank that takes the hit, or maybe the insurance company insuring the bank. Even if your account gets hacked or if you run into a case of identity theft, there are ways to get your money back easier than if it had been taken in cash form.

  • But what happens if the bank you opened your account with goes bankrupt?
    • This actually happened to many people in 2008.
    • If your bank is FDIC insured, they will guarantee all checking, savings, money market deposits and CDs up to $250k. According to the FDIC website, “Since the FDIC was established in 1933, no depositor has lost a penny of FDIC-insured funds.” [1]
    • That’s great for a quarter of your money, but you would still lose $750k. That is no good!
    • And if your bank is not insured by FDIC, you might not get any of that money back.
    • Additionally, checking accounts usually do not pay much interest, so your inflation risk is just as high as it is with cash.

Savings Accounts

This is a baby step up from checking accounts and unfortunately, just about all of the same risks apply.

  • Savings accounts do typically pay interest. However, these interest rates are so low, inflation will almost always out pace you.
    • Not to mention, that same money the bank is paying you fractions of a percent on (say 0.15%), they are turning around and loaning it out at rates exponentially higher (4%, 7%, – all the way up to 20% and 25% on credit cards).

And if you are thinking, what if I put half in checking and half in savings? Would FDIC cover me for $250k in each account? Nope!

  • The $250k deposit insurance is a total between all monies at the same bank, in checking, savings, money market deposits, and CDs.
    • So, for an individual splitting between these accounts at the same bank, they would only receive a maximum of $250k back in the event of a total bankruptcy liquidation.

Money Markets & Certificates of Deposit (CDs)

[1] Understanding Deposit Insurance https://www.fdic.gov/deposit/deposits/ 11/14/19

These are other types of accounts you can have at your bank. Now the interest starts to get a little closer to inflation.

  • There may be some years where these types of accounts can keep up with inflation, however when market interest rates are very low (like this year), this will still lag behind.
    • But, because the bank is paying you more, they put stipulations on when you can withdraw this money.
    • With most money markets accounts and CDs, if you draw upon your million dollars before a certain date, you fill forfeit all interest and you might as well have kept the money in a checking account.
  • And remember, you are still at a bank.
    • All of the same risks about your bank going under still apply.
    • And the fact that you are getting paid more for these types of accounts should hint that these may be even a little riskier than checking and savings accounts in the event of insolvency.


Treasury Bonds

Here is where it gets interesting. Believe it or not, this is where an individual is probably taking on the least amount of risk.

  • Typically, interest on treasuries is high enough to keep up with inflation, especially in the longer-term bonds.
    • Unfortunately, as I write this article, interest rates are historically low. So, for this year, treasuries do pose inflation risk.
    • But the long-term average of the 10-year treasury bond yield is 4.41%, well above our 2% inflation hurdle.
  • And the best part is, these bonds are backed by the full faith and credit of the United States Government.
    • That means the government would have to be insolvent for you to not get your money back.
    • In its history, the US Treasury has always made its payments and has returned investors their principal. And if the government goes under, then can forget about your bank accounts and your mattress cash because the dollar and the banking system will be in even rougher shape!
  • Treasuries get another advantage – tax breaks.
    • All interest you earn at a bank, from the various accounts above, is fully taxable. Yep, basically cut out a quarter of that interest you made because it adds to your income.
    • But treasury interest is state-tax exempt! This bonus is irrelevant for all you Nevadans and Floridians. But for us Californians, this is a big deal.
  • Lastly, treasuries are bonds that trade in the secondary market and on exchanges.
    • This means, you do not have to hold your bond until maturity.
    • And depending on where interest rates are, you may be able to sell early with a gain as opposed to money market accounts and CDs where that would not be possible.
    • Treasuries even settle a day faster than stocks and corporate bonds, so if you need the money in a pinch, it can get to you faster.

The point here is not to scare anyone into thinking that cash isn’t safe or that the money in your bank is in imminent risk. These are still some of the safest asset forms around. But most people just assume their money here is guaranteed, which is not the case. And to no fault of anyone’s, banks obviously want you to feel that way. Even the sayings “that’s money in the bank” or “you can take that to the bank” imply something you can count or that something is a lock to happen.

I am not saying you should never have cash or that you should run to your bank and put all your saved money in treasuries. These money forms are crucial for liquidity and are necessary for spending and ease of payment. However, if you start to see one of these asset forms grow too large, it might be time to consider diversifying. Taking some of the extra, unused cash, checking, or savings money and putting it to work can be a great idea. And lots of times, you’ll actually be lowering your risk exposure.

At Anchor Bay, these scenarios are constantly playing out with our clients. We help individuals navigate through these various forms of low risk by putting their money where it is most efficient from a risk, tax, and financial goals perspective.

And the next time you are at the race track, and your friend leans over and says, “horse number three is a lock to win, that’s money in the bank”, you’ll know to think twice.