The Safest Investment
The Safest U.S. Investment
For Your Keep-Safe Funds
When planning for retirement, a common error investors make is to confuse keep-safe money from risk money. They’re not the same. And they should be kept separate.
Keep-safe money should be protected as much as humanly possible from losses. It should be available when you need it for emergencies. And it should grow almost entirely by generating a steady yield.
Risk money is not necessarily for speculation — it can also be invested with prudence and caution. But in either case, it’s for investments that can go up or down, that aim primarily for profit, but can also deliver losses.
In this article, we discuss what to do with your keep safe money. In our accompanying article, we focus on your risk money.
One of the first lessons learned by investors in the early 21st century was that stocks are riskier than most people thought. They learned that the stock market may be a good place for some of their money, but may not be the right place for all of their money.
This is true whether you believe the market is going up or down. It’s true whether your stock portfolio is mostly tech or nontech, growth stocks or blue chips, considered high-risk or relatively “safe.” It’s true whether you own stocks directly or through a mutual fund, in a 401(k) or a regular brokerage account. You could have bought them many years ago or just recently. You could have profits or losses. It doesn’t matter. The stock market is not the place for your keep-safe funds.
No one knows what the future will bring. But if you have much or most of your keep-safe money in the stock market, you must ask yourself: “Can I really afford this risk? By holding on to these stocks, am I jeopardizing my retirement? My kids’ education? My long-term health care?”
“But I can’t sell now,” say many of today’s investors. “I can’t afford to take the loss.” Our response: You already have taken that loss. It’s a reality. And in the real world, there’s no substantive difference between a “paper” loss and a “realized” loss. They’re both reflecting the fact that your stock has gone down. Whether you hold the stock or sell it, you cannot change that.
That’s why regulators require companies to mark their portfolios down to the current market value. When you’re looking at your portfolio, you should do the same.
“I can’t sell now,” say many other investors. “I can’t afford to take the profit and pay the taxes.” Our response: Uncle Sam is your silent — but permanent — partner, whether you sell now or later. So always evaluate your stock portfolio net of capital gains taxes.
In the final analysis, there is only one question you need to ask: Am I taking a risk with my keep-safe funds? If you are, then it’s not time to hold — let alone to buy more. It’s time to sell. Your goal: Get your keep-safe funds to safety. Invest only your risk money.
The next question: What’s the safest investment in the United States today?
For maximum safety, many investors use short-term U.S. Treasury securities — Treasury bills.
You can buy them directly from the U.S. Treasury Department (800-722-2678 or www.publicdebt.treas.gov) by opening an account with your Social Security number. Or you can buy them through your broker.
Another approach: Use a Treasury-only money fund — a money market funds that specializes in U.S. Treasury securities.
A Treasury-only money fund invests all of your money in short-term U.S. Treasury securities (plus other securities that are 100% backed by U.S. Treasuries). It uses a bank, but strictly as custodian for the securities.
Most Treasury-only money funds also provide you with check-writing privileges so that you can use the money fund as your personal or business checking account. There are many advantages:
Advantage #1. Higher Yields. Most Treasury-only money funds pay much more than the yield offered on the average personal checking account in the U.S. today.
If you assume an average balance of $5,000, and you can boost your average yield from, say, 1.5% to 3.5%, your interest income, when compounded, can actually be 2.6 times greater.
Assuming no change in these rates, over a 10-year period, you would boost your interest income from $809 to $2,092.
In your business checking account, if you assume an average balance of $50,000, your interest income with a Treasury-only account over 10 years will be $20,917. That’s a total 10-year return of nearly 42% on your money that you might not have earned otherwise.
Plus, in a business of fairly average activity, we estimate that you will also be able to take better advantage of the float — the funds remaining in your account while checks written against them have not yet cleared.
With this float, your average daily balances can increase by 50% or more. Assuming an average daily bank balance of $75,000, your total yield on your $50,000 book balance jumps to $31,376 over 10 years.
Advantage #2. Low Fees. When a bank quotes you yields — on any kind of account — it typically quotes you the yields before deducting all the service fees.
In contrast, when a money fund quotes you its yield, it is invariably after deducting its fees and expenses. Of course, the past or current yield is no guarantee of future results. But the yield quoted is the net yield that investors in the fund are actually earning.
How much of a difference can this make? In most cases, a very large one. Indeed, we figure that, after deducting the myriad bank fees, most Americans today are getting a net yield of close to zero on their checking accounts.
For example, it rarely costs banks more than $2 to process a bounced check, but most charge you close to $30. It costs them nothing to receive a wire transfer from another bank, but most banks charge $10 or more.
Banks charge you for too many transactions ... and they charge you again if you have too few transactions. They get you on the way in when you make deposits — and on the way out, when you make withdrawals.
They often charge a hefty fee if you use the automated teller machines, and with some accounts, many will charge you yet another fee if you use live tellers.
In contrast, most money market funds charge you nothing or very little for each of these situations.
Advantage #3. One account for both checking and savings. At banks, most customers divide their money between (a) a checking account, where they give up most of their yield, and (b) a savings account or CD, where they give up immediate access and liquidity. No matter what, it’s difficult to get both optimal liquidity and high yield in a single bank account.
In contrast, money funds let you keep nearly all of your cash assets — whether for savings or for checking — in one single account. This means that whether you’re investing one thousand or one million ...
- You have complete access to all your funds at all times.
- You can withdraw the entire amount, with no penalty. Just write a check or request a wire transfer.
- Your money consistently earns competitive, current market yields.
- You never have to worry about “leaving too much in your checking account at low rates.” The full amount is available for checking at all times, earning full interest.
- You continue earning interest on your money up until the moment your check clears. The longer it takes for your payees to cash their checks, the more interest you make on this “float.”
- If you want to use your account as your most active checking account to pay most of your bills, that’s even better. The more you use it, the more you take advantage of the float.
- In short, you are always getting maximum liquidity and maximum yield on your entire balance.
Advantage #4. No limit to your account size. When you use banks for your savings or your checking, to maximize your FDIC insurance protection ...
- You have to spread your CDs among various accounts. This means you would have to keep track of several accounts at the same time.
- In each CD, you have to make sure your initial investment in each CD is actually under the $100,000 limit. Otherwise, the accumulation of accrued interest could put your balance over the limit, and that portion would not be covered by the FDIC.
Here’s the crux of the dilemma with any bank checking account: To make sure your funds are covered by the FDIC, you need to keep your balance under $100,000. But to maximize your interest on the float, you’d want your balances to be as high as possible, with no limit at $100,000. Result: The two goals are in conflict.
With Treasury-only money funds, we believe that insurance is a moot point. Your funds are invested strictly in securities that are guaranteed directly by the full faith and credit of the U.S. Treasury Department. And there is no limit on the Treasury’s guarantee of its obligations.
Unlike bank accounts, there is no limit to your account size with a Treasury-only money fund— another reason for keeping nearly all your cash in one single, easy-to-manage account.
All the assets in a Treasury-only money funds are invested in short-term U.S. Treasury securities (plus some securities that are fully backed by U.S. Treasuries). These are widely considered to be among the safest securities in the world. So they are simply not at risk.
Nor does the U.S. Treasury Department distinguish between where or how the Treasury bills are held. Whether you own them directly or you own them through a Treasury-only money fund, they are still Treasuries, and they are still guaranteed.
Advantage #5. Exempt from local and state taxes. The income you earn on both Treasury-only money funds and bank accounts is subject to federal income taxes. There is no difference between banks and Treasuries in that regard.
However, when it comes to local and state income taxes, there is a difference: The dividends you earn on Treasury-only money funds are usually exempt. The income earned on bank accounts and CDs is not exempt.
Advantage #6. Truly FREE checking. Nearly all banks charge you — one way or another — for your checking privileges. They may charge you a fee for each check you issue. They may charge you a flat monthly service fee. Or they may charge you a combination of both.
Sometimes banks say they’re giving you “free checking,” but require large minimum balances, paying little or no interest. No matter what, you’re probably paying for checking — and probably too much.
The specific rules on how to maintain your average balances to qualify for free checking can be complex and hard to follow. Furthermore, they vary from bank to bank, and can change whenever your bank is bought out by another institution. Keeping track can be like a full-time job.
Most Treasury-only money funds do not charge you any extra fee for check-writing privileges. You can write as many checks as you want, as often as you want. At most money funds, when they say “free checking privileges,” most of them really mean it. They guarantee that ...
- You will never have to pay an extra monthly fee for checking.
- You won’t have to worry about how much it costs you to write each check. They’re all free.
This is not true for all Treasury-only money funds. And many do levy certain charges for special services — that’s to be expected. But they’re usually lower than the charges at banks. Moreover, if you shop carefully for the right fund, you can reduce even these charges down to virtually zero.
Advantage #7. Immediate liquidity. As with any financial institution, there will be a holding period for the out-of-town checks you deposit to your account. But your money goes to work for you right away, generating interest income immediately. And if you deposit your money via wire transfer, you can avoid the holding period; your funds will be available immediately.
In short, except for the holding period, all of the funds received by your Treasury-only money fund are available to you all of the time.
There are three ways you can withdraw your money from your Treasury-only money fund:
- You can write a check against the balance in your account — to yourself or to another payee.
- You can call or send a fax to your money fund’s shareholder service department, giving them instructions to issue a wire transfer. (Before the fund can accept your wire instructions, however, you will have to file a signed authorization ahead of time. This can be done when you open your account.)
- You can request a check be sent to you directly from the fund. You can also authorize telephone instructions for redemption by check when you open your account.
The disadvantages: As you can see, there are many benefits in using Treasury-only money funds for your keep-safe money. They can save you a great amount of money and time. They give you far more access to your money, opening up new investment opportunities, and potentially transforming the way you do business. However, there are also three disadvantages:
First, money market funds are not insured by the FDIC. But they are very strictly regulated by the SEC. Moreover, as we stated earlier, if you are buying a Treasury-only money market fund, the investments they own on your behalf are guaranteed by the U.S. Treasury Department.
Second, money funds may impose a minimum amount for each check, usually $100. So you may need a small checking account for checks under $100.
Third, they do charge fees and operating expenses. So your yield may be somewhat lower than what you could earn by buying Treasury bills directly. But we feel that’s a fair price to pay for the extra convenience, liquidity and check-writing privileges.
Here’s How To Set Up Your Treasury-Only
Savings And Checking Account
Follow these steps to open your account:
Step 1. Decide what type of account you want to open. For your personal checking account, it could be established as an individual, joint, custodian, or trust. (In addition, you can also use your Treasury-only money fund to open a separate account for your IRA or other retirement accounts.)
Step 2. Select any one of the many money market funds in the U.S. that invests exclusively in short-term U.S. Treasury securities or equivalent. These equivalents can include “repurchase agreements,” which are fully backed by U.S. Treasury securities or other Treasury-only money funds. All of these qualify for state and local income tax exemption in most states.
Note: If a money fund invests in non-Treasury instruments — certain U.S. government agency securities, commercial paper, bankers’ acceptances, or bank CDs — it does not qualify for a full local and state tax exemption.
Step 3. While you’re on the phone with them, ask a few questions about the costs associated with check-writing privileges:
“How many checks will you provide for me at no charge?” For personal accounts, at least the first 20-25 checks should be free. If you want additional checks, it’s reasonable to expect a printing charge, but it should not be more than $15 per 200 checks.
“Will you charge me a per-check transaction fee?” If the answer is yes and you anticipate a relatively active account, don’t do business with this fund.
“What is the minimum dollar amount for which I can make out each of my checks?” It should be no more than $100. If it’s over $100, this fund may not be suitable for most of your checking needs.
“What is the minimum balance that I must maintain in my account, and will you penalize me if my balance falls below the minimum?” If the minimum is too high for you or if there is a penalty, you may want to look elsewhere.
Step 4. Ask the fund: “What is your 7-day simple yield?” Make sure you use this exact terminology — 7-day simple yield. This is the past seven days of income on a fund, expressed as a percentage of the fund’s net asset value and calculated on an annual basis.
Since the yields are calculated daily, they are bound to vary. So don’t pay much attention to yield differences of up to ¼ of a percentage point (.25%). However, if the 7-day simple yield is ½ percent (.50%) or more below that of other Treasury-only money funds, you may want to consider another fund.
Step 5. Download a prospectus or ask them to mail one to you, along with the appropriate account application. Read it carefully before investing.
Step 6. If you are not sure about what forms and documents you will need to submit to open an account, now is the time to ask. Some typical types of accounts, along with the documentation needed, are:
Type 1. Individual or joint account, minor custodian account: You’ll need the application and the signature card (indicate the number of signatures that will be required to cash a check).
For joint accounts, unless you specify otherwise, they will probably be opened as joint tenants with rights of survivorship (JTWROS), meaning that the entire account balance will pass to the survivor in the event of death of one of the joint owners.
If you want the account to be registered as joint tenants in common (JTIC), be sure to specify that in writing when you open the account. JTIC means that each person owns a set percentage of the account; and if one person dies, his or her percentage does not automatically go to the survivor, but goes into the deceased’s estate to be distributed.
If you wish a custodian account for a minor child (UGMA), don’t forget to use the child’s Social Security number for correct IRS reporting.
Type 2. Trust or guardianship: You will need the application and the signature card (indicate the number of signatures needed to cash a check). Plus, you will need certified copies of the appropriate trust documents or court papers appointing a guardian and any power of attorney forms, if applicable. Hint: Put the trustee name(s) first on the account registration to reduce the paperwork that would be needed whenever an account transaction is requested. Example: Jane S. Doe, TTEE Doe Family Trust.
Type 3. IRA, ROTH IRA or other retirement account or rollover: Ask for the IRA or retirement plan application and agreement. This information should include a new account application, a transfer authorization and a rollover certification form.
If you’re opening a new retirement account, fill out the new account application only.
If you’re transferring a retirement account directly between custodians, fill out both the application and the transfer authorization. Also be sure to include a copy of the most recent statement from your current custodian.
If it’s an IRA rollover and you have a distribution from a retirement account that you are going to transfer to the Treasury-only money fund, fill out both the new account application and the rollover certification form. (Important: Due to IRS regulations, check writing is not possible on IRA accounts.)
Step 7. With the above documents, also provide the basic wiring instructions to the fund. If there is no space on the application, put the following information in a separate, signed letter:
- Your bank’s name, city and state
- Your bank’s “ABA” number
- Your bank’s wire transfer account number
- Your account number at the bank
- All registered names on the account
Note: The account title on your bank account should be the same as the title on your Treasury-only money fund account.
Step 8. Don’t forget to sign the application. Then make your check payable to the Treasury-only money fund and mail it with your new account materials. You should receive written confirmation of your deposit in the mail within a few days, and a checkbook within about two weeks. Look over these materials carefully to verify that all is correct. Be sure to call the fund immediately if there is any discrepancy. And don’t use your checks if they are printed incorrectly.
Now, Here’s How To Maximize Your Yield With
Treasury-Only Savings And Checking
Once you have completed the above eight steps to establish your Treasury-only account, proceed with the following steps:
Step 9. Keep only a minimal amount in your local bank. Most people maintain balances of $500 — $2,000 for petty cash and small, occasional checks.
Step 10. Use a major credit card for as many of your purchases as possible. Then, in order to avoid any interest charges, pay off your credit card in full each month with one check written off your Treasury-only money fund.
Step 11. To maximize your total yield and liquidity, transfer the bulk of your cash funds to the Treasury-only money fund account. These can include any investment funds you wish to keep liquid and available for upcoming opportunities, most of your regular spending money, and most of your keep-safe savings.
Step 12. Write all of your checks that are above the fund’s per-check minimum from this account. These should include checks for paying your mortgage, rent, monthly credit card bills, utility bills, and any large purchases at establishments that give you a better price for non-credit card purchases.
Step 13. If you need a large amount of cash or want to buy traveler’s checks, just call your Treasury-only money fund and give them instructions to transfer the money to your local bank. In most cases, if you call before 3 PM, you should have the funds in your account the very next business day.
Step 14. At most funds, you may deposit your salary and any checks payable to you directly into your account. Just endorse the checks with your signature on the reverse side and include the words “for deposit to,” followed by your account number at the fund. Then simply mail your deposit to the fund. (You may use the deposit slip and envelope that most funds provide you with your monthly statement.)
As always, do not send cash in the mail. If you have cash deposits, make them at your local bank and then send the funds to your Treasury-only money fund via either a check or wire transfer.
If you want to know if your check has cleared your fund, and you don’t want to wait for the written confirmation in the mail, just call the fund’s shareholder services at its toll-free number.
You will receive monthly statements from the fund showing all your checking transactions, plus any other activity including deposits, dividend income credits, etc. (Note: Canceled checks are not usually returned to you automatically, unless you specifically ask for them.)
With these steps, we feel your keep-safe funds will benefit from superior safety overall, significantly greater effective yields, greatly reduced bank charges, and maximum liquidity.