Holding cash

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RandomPointer
Posts: 277
Joined: Sat Nov 23, 2013 1:38 pm

Holding cash

Post by RandomPointer » Sun May 26, 2019 9:24 pm

I started buying CDs last year. I thought the return for the risk was better. This year, I found it difficult to find CDs with the right duration (less than five years), with a decent return. Two years brokerage CD yields 2.4%, and money market SEC yield is about the same. I don't think I am getting compensated with that yield.

I am looking at intermediate bond funds, and the yield is not that much higher for the duration. The bulk of my fixed income is still with VBIIX.

I will have a decent amount of extra cash early next month. I read a recent thread about paying off mortgage. I have 11 years left in my mortgage, with 3% interest. I may split cash that I will receive half into mortgage, and the other half stay in money market, rather than buying CDs.

Thoughts?
Last edited by RandomPointer on Mon May 27, 2019 12:46 am, edited 1 time in total.

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Sandtrap
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Location: Hawaii No Ka Oi , N. Arizona

Re: Holding cash

Post by Sandtrap » Sun May 26, 2019 9:31 pm

RandomPointer wrote:
Sun May 26, 2019 9:24 pm
I started buying CDs last year. I thought the return for the risk was better. This year, I found it difficult to find CDs with the right duration (less than five years), with a decent return. Two years brokerage CD yields 2.4%, and money market SEC yield is about the same. I don't think I am getting compensated with that yield.

I am looking at intermediate bond funds, and the yield is not that much higher for the duration. The bulk of my fixed income is still with VBIIX.

I will have a decent amount of extra cash early next month. I read a recent thread about paying off mortgage. I have 11 years left in my mortgage, with 3% interest. I read a recent thread about paying off mortgage. I may split cash that I will receive half into mortgage, and the other half stay in money market, rather than buying CDs.

Thoughts?
Great idea!

j :happy
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TNWoods
Posts: 30
Joined: Sun Feb 10, 2019 10:04 am

Re: Holding cash

Post by TNWoods » Mon May 27, 2019 8:29 am

If you were able to buy an 11 year CD with 3% interest, would you want that?

I know many here never advise paying off a mortgage since you can get a better return in the stock market, but if your choice is between the mortgage vs the bond market or CDs, maybe looking at it that way helps think about things from a little different angle?

TNWoods

Dandy
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Re: Holding cash

Post by Dandy » Tue May 28, 2019 8:35 am

It is great to be debt free especially mortgage free. 3% fixed mortgage is a decent rate.

I would suggest the goal would be that your mortgage would be zero no later than say age 60 -- Ideally 55. You don't want to retire or be forced to retire and still have monthly mortgage payments.

You should consider whether under the new tax laws your mortgage interest payments are still helping you itemize your taxes to see if that impacts your decision.

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ruralavalon
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Location: Illinois

Re: Holding cash

Post by ruralavalon » Tue May 28, 2019 9:27 am

RandomPointer wrote:
Sun May 26, 2019 9:24 pm
I started buying CDs last year. I thought the return for the risk was better. This year, I found it difficult to find CDs with the right duration (less than five years), with a decent return. Two years brokerage CD yields 2.4%, and money market SEC yield is about the same. I don't think I am getting compensated with that yield.

I am looking at intermediate bond funds, and the yield is not that much higher for the duration. The bulk of my fixed income is still with VBIIX.

I will have a decent amount of extra cash early next month. I read a recent thread about paying off mortgage. I have 11 years left in my mortgage, with 3% interest. I may split cash that I will receive half into mortgage, and the other half stay in money market, rather than buying CDs.

Thoughts?
We also use Vanguard Intermediate-term Bond Index Fund for our fixed income allocation, current SEC Yield = 2.23%. We don't switch funds looking for better returns, but stick with that fund. We don't hold a "cash" allocation, like a money market fund, savings accounts, or short-term CDs.

In my opinion it's reasonable to use extra cash for accelerated pay off of the 3% fixed rate mortgage, rather than add to a cash allocation.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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welderwannabe
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Re: Holding cash

Post by welderwannabe » Tue May 28, 2019 10:11 am

Sandtrap wrote:
Sun May 26, 2019 9:31 pm
RandomPointer wrote:
Sun May 26, 2019 9:24 pm
I will have a decent amount of extra cash early next month. I read a recent thread about paying off mortgage. I have 11 years left in my mortgage, with 3% interest. I read a recent thread about paying off mortgage. I may split cash that I will receive half into mortgage, and the other half stay in money market, rather than buying CDs.
Great idea!
+1
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

JoeFriday
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Re: Holding cash

Post by JoeFriday » Tue May 28, 2019 3:34 pm

There are online banks offering 2 yr CDs in the range of 2.7 - 2.8%, competitive with your VBIIX holding which has a 30 day SEC yield of 2.76%. The bond fund also carries interest rate risk and some credit risk. If the general direction of rates going forward ends up being down, the share price appreciation might make the total return of VBIIX better. But, with risk free 3 month T-Bills at ~2.35%, tying money up for 8 times that long for 35 - 40 bp doesn't appeal to me. I'm not going further out than that unless/until I can get a better sense of the direction of rates from here.

TNWoods
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Joined: Sun Feb 10, 2019 10:04 am

Re: Holding cash

Post by TNWoods » Wed May 29, 2019 8:21 am

Given that you want very low risk options, it seems that everything suggested so far has a return significantly below the 3% you are paying on your mortgage.

I understand the view that many on the forum have about keeping a mortgage so you can put money into index funds instead, since that way you are using leverage to get the index returns. But if you remove those from consideration, and are only left with options that pay 2.5% or less...why would you pay 3% to leverage into that?

TNWoods

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jabberwockOG
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Re: Holding cash

Post by jabberwockOG » Wed May 29, 2019 8:26 am

If you already have significant cash in CD's, definitely pay off the mortgage ASAP. Pay off is equivalent to a 100% risk free 3% return after tax for 11 years.

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