What should I do with my cash savings?

This is an audio transcript of the Money Clinic podcast episode: ‘What should I do with my cash savings?’

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Claer Barrett
Hi, it’s Claer here. The FT has granted me some time off for good behaviour. But I leave you in the very capable hands of my colleague, Brooke Masters, the FT’s New York-based financial editor. This week, she’s examining the role that cash plays in our portfolio and what to do with your emergency fund in the current economic climate, with great takeaways for listeners on both sides of the Atlantic. Enjoy.

Brooke Masters
Thank you, Claer. I’m Brooke Masters, the FT’s US financial editor, and welcome to Money Clinic. As Claer mentioned, today’s show is all about cash. When I found out I would be hosting the show this week, that’s the topic I knew I wanted to dive into. Right now, inflation rates are running high and people’s household budgets are getting tighter. And there are so many different places to stash your money. How much emergency cash do we really need to keep on hand? And while it’s tempting to stick our money under the mattress when the markets are stormy, there are better options so that we are not losing out on potential earnings. I’ve wrestled with these questions myself. And so today I talk with two very knowledgeable people who are going to help us find some answers: Moira O’Neill . . .

Moira O’Neill
Hi, I’m Moira. I write a column for FT Money in the UK.

Brooke Masters
. . . and Georgia Lee Hussey.

Georgia Lee Hussey
Georgia Lee Hussey. I’m the founder and CEO of Modernist Financial, a wealth management firm and at lovely Portland, Oregon.

Brooke Masters
Moira writes about investing for the FT, and she’s the author of multiple personal finance books. Georgia works with many clients within her wealth management firm, Modernist Financial, to help them structure their wealth and investments around their progressive values. We cover all the bases when it comes to cash, anxiety around having enough of it, where to keep it, and how much we should be saving versus investing. So let’s get into it. Here’s my conversation with Moira O’Neill and Georgia Lee Hussey.

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Let’s talk about savings. Moira, you want to get us started? What do you think?

Moira O’Neill
Sure. Well, I think the UK is really a country of extremes when it comes to savings. So lots of people have too much. And then the vast majority of people don’t have anything, really, to fall back on in an emergency. The ideal, really, is to have between three and six months of your outgoings saved up somewhere safe in the bank so that if financial emergency happens, you lose your job is the biggie, then you can dip into that fund. Now, lots of people oversave. I think women are particularly bad at this. (chuckles) I mean, it’s a really healthy thing to be saving and diligently putting aside something every month. But if it’s just going into the bank, it’s not got the potential to grow. And then lots of people just don’t save up a pot so they don’t have anything to fall back on. So what you want to be is there in the healthy middle with that decent sum saved up, and then you can start to plan for the long term properly.

Brooke Masters
Georgia, you talk about a holistic money management. How do you talk to your clients about the amount of money they ought to be saving in emergency-ready money?

Georgia Lee Hussey
Yeah. It’s an interesting question because I think it really gets to the heart of the behavioural reality of how people make decisions. I think Moira is referencing this, that maybe women in the UK have a tendency to save higher amounts. I’m not sure what the historical reasoning for that is, but I could take a few guesses. And I often start with understanding what is the history of their savings patterns and what is their familial history of savings patterns? I find that folks who have a family history of significant upheaval have a tendency to save more. So helping people bring that to consciousness is also helpful because, as Moira also points out, oversaving can be actually an anxiety action as opposed to a logical “I need X amount in order to buffer me against these unforeseen circumstances.”

So we think about it in layers. So I want you to have half a month or a month of extra cash in your checking account. Then I want you to have probably another month of back-up in a savings account that’s attached to your checking account at your credit union or your bank. And then for most folks, I’m looking at, especially in this gorgeous market of rising interest rates, finally, at least on the savings account side, (chuckles) you can get a high-yield account that will pay four and four and a half per cent, which feels like a dream of the early aughts to me at this point. So then we’ll add another two to three to four months in that high-yield savings account. Once those layers of cash are set aside, then the question is: why is there more? What’s the purpose? If there’s a purpose like a down payment or a big sabbatical or a large investment of some kind that needs to be paid out in the next two to four years, then I would probably say keep it in the high-yield account. But if it’s any longer a time period than that, then we’re going to have very intentional conversations about understanding how investments will help you outpace inflation, etc.

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Brooke Masters
It is a higher rate environment. It’s also a very high inflation environment. How should that change the way people think of things? I’ll fess up. I feel very anxious if I don’t have a lot of cash. So we always have too much in our checking account. But my husband has finally convinced me that, you know, if inflation is running 5 per cent a year, this is no longer some sort of indulgence he is willing to put up with. You know, for years he was like, “Fine, you can have too much cash.” But now he’s like, “This is ridiculous.” So, Moira, give us a sense of how does inflation change the dynamic for people?

Moira O’Neill
Well, I think there are always risks around everything that you can do with your money. And of course, the big risk of holding it in the bank in your easy-access account, we call it here in the UK, is that it’s guaranteed to be losing money to inflation, losing its value. There are no guarantees that you’re going to get great growth from doing different things with your money. So the stock market, for example, that’s where you’re taking on different types of risks and you could lose it. At least in the bank, it’s likely to be the safest place for it. There’s a balance to be had here, but I think if you have five years of income saved up in the bank, which some people do, and they feel it’s great confidence to have that, I think you need to seriously have a rethink because your money is not having the chance to grow for the long term. And it’s losing its value, even though it’s earning its four and a half per cent.

Brooke Masters
I liked Georgia’s idea of layering it. Should we talk a bit about the kinds of products you can layer? So obviously there’s the very basic day-to-day easy-access account, which Moira just mentioned. And then there are, a lot of banks now offer a sort of a high-yield savings account and other options. Should we talk about the pros and cons of each one? Like what’s good about having it in a high-yield savings account? What’s the bad part?

Moira O’Neill
I think people need to be prepared to move for better rates there. So current account providers sometimes offer really great deals, so they offer you 100 quid here, 200 quid there to switch. Go do that. It’s easy to switch now and you hear stories of people earning an easy thousand pounds a year just from switching their current account. And you know those current accounts quite often . . . some of the better banks offer a really high regular savings account attached to the current account, which is a great way of earning high interest, albeit it might be on a small portion of your savings, but do take advantage of that. And then if you can afford to lock your money away for a year, two years, three, or even up to five years, you’ll find that you can get better rates of interest. Now, not everybody wants to do that because interest rates are a moving thing and if you lock it away, you might miss out or if rates improve in future. So what a lot of people do is create what I like to think of as ladders. So you have some money in the one-year locked away account, some in the two-year, and then once your one-year deal expires, then you can move on to a new one. And so you can layer up different types of accounts to get quite a good rate overall.

Brooke Masters
Georgia, in the US, obviously we have sort of similar term accounts which are the certificates of deposit, CDs, but we also have money market funds which have gotten a lot of attention lately because a lot of money has been going into them. Can you explain why they’re different than bank accounts and what the pros and cons are?

Georgia Lee Hussey
We generally recommend using those accounts when they’re connected with high-yield savings accounts. And especially this new product, which may be similar to what you’re talking about, Moira, which is a collection of banks that come together to ensure your deposits. And what’s also happening in that algorithm is the fintech firm that is managing that process is also going out and trying to get the best yield for you. So it’s often a bunch of regional banks that are offering these deals and they’re able to bring them all together. We generally recommend those accounts. When I looked at rates on money market accounts, they have not been better than the high yield. And so I have a hard time recommending those when I think there’s another — I love this term — easy access. (chuckles) There’s another easy-access account that’s available.

What our clients generally do again, is the checking account, a very simple savings account. Hopefully it’s got a decent yield, then the high-yield fintech version of their savings account. And then at that point we are generally looking at bond funds because most of our clients and most anybody, I don’t think, is actually sophisticated enough to play ladder, especially in a rising interest rate market. So we generally recommend not using CDs in this moment because right now CDs tend to be yielding lower than high-yield savings accounts, which are completely liquid and insured. So that’s how we recommend utilising the US products that are available.

Brooke Masters
I think for our British listeners, money market funds, of course, are not bank accounts. They look like bank accounts in that you . . . sometimes you can even write checks off them, but they aren’t covered by deposit insurance. Is it ever worth putting your money in something that isn’t covered by deposit insurance if it is your safety money?

Georgia Lee Hussey
In the US, I don’t see a reason to, given the fintech options. I mean, we offer one through our firm to our clients and it has like one and a half-million dollars of insurance on it. So why would you take risk when the yield is going to be marginally better? That’s how I would look at it.

Moira O’Neill
In the UK, we have the Financial Services Compensation Scheme, which protects your money up to 85,000 per person per institution. And so the recommendation is always to spread any very large lump sums among institutions up to that amount so that if anything were to fail, you would be within the limits for compensation. But there’s one bank where the limits don’t apply, and that’s the government banks. They’re National Savings & Investments. The trade-off there is really that National Savings & Investments accounts don’t have market leading rates, but it is the ultimate safe haven for your money. And the one product that people find very popular is premium bonds, which are offered by National Savings & Investments. Now, they’re not savings. It’s like a sort of mini-lottery, really. There are prizes on offer and those prizes are tax-free and you can hold up to £50,000 in premium bonds. The prize fund delivers an interest rate of 3.3 per cent, which is OK. And some people win more than that. Some people win absolutely nothing. It’s easy access. So a lot of people use that for their emergency fund. And there’s always a chance that you might win a big prize. The top prize is a million pounds.

Brooke Masters
Wow.

Georgia Lee Hussey
That sounds fun. Can we get that in the US?

Brooke Masters
I like that. Yeah, exactly. I was . . . I’m getting three and a half per cent from my savings account, and I don’t have any lottery attached to it.

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We’ve talked a bit about deposit insurance and obviously the UK limit is £85,000. The US one is 250,000. But in the US, we’ve recently had a lot of publicity about whether banks are safe and whether there needs to be more deposit insurance.

Do you have a sense, Georgia, whether this is affecting people’s decisions to save? Are they freaked out by all this? And is it changing the dynamic?

Georgia Lee Hussey
Yeah, it’s a good question. I’m concerned because I think this moment is causing people to move their money out of regional and smaller banks and into the big banks. That is very problematic, especially as somebody who’s oriented around values and financial decision-making. So I think there is a . . . well, the reason I’m starting with this is that I think there is, again, a money story circulating right now that big is safe and small is not safe when the insurance applies across all types of banks in the same way. Credit unions have the same 250,000. There is a wonderful FDIC calculator on their website that allows you to put in your bank account structures and tell you how much coverage you have. So if you own an account jointly, you have $500,000 in coverage in that. If you have more than $500,000 in your savings account, we need to have a conversation about why you have more than $500,000 (chuckles) in a savings account unless there’s like a down payment that’s going to happen in the next six months. I think the amount question is a question that’s circulating because of anxiety, not necessarily because of a . . . investors or retail need that’s out there. That’s my perspective on it.

Brooke Masters
That’s interesting. Actually, you mentioned this question of sometimes you do need more cash or at least readily available money. I mean, what are the kinds of things people should be thinking about, you know, beyond the OK, you need three to six-months’ savings and obviously you need to save for retirement. What is there in between those two that might mean you want more readily available cash and how should people think about that?

Georgia Lee Hussey
Well, financial planning is a very long timeline. We’re here today. Eventually want to retire. Eventually you will no longer be with us and your assets will go somewhere. In between there’s a lot of other financial milestones that happen for people depending on your phase of life. So usually the cash need is related to those milestones, right? If you need that money for a downpayment in two years, it better be in a deposit insured account hoping that it has a decent return or it’s a two-year bond that is getting a decent return. But if you want to buy a house in eight or nine or 10 years, I’m probably not recommending that it’s going into bonds entirely. I’m probably recommending like a 30 per cent stock, 70 per cent bond portfolio. So we’re getting some return. We’re also getting the benefit of the market because then we have a real concern about outpacing inflation, especially when the inflation rate for housing is significantly higher than the general inflation rate. So the way we always talk about it is you need to link up the investments allocation that you have with the time horizon of the goal.

Brooke Masters
Moira, how do you think about it?

Moira O’Neill
I completely agree with Georgia. That five-year rule is really important. So you’d say, if you can’t lock your money away for at least five years, then you shouldn’t be going anywhere near the stock market. And that really means you have to use the cash accounts. You have to use the notice accounts where you lock your money away for one, two, three, four years to get the higher rates. And you know, this may happen if you’re in retirement, but it can also happen if you’re in your twenties saving for a deposit to put down on a house which you intend to buy within the next five years. It can happen if you are saving up for a wedding or your next car. There’s all sorts of life reasons why you might need to keep a little bit extra in cash, and it’s always related to some kind of purchase generally. Think about that five-year rule really carefully. Don’t make the mistake of not letting your money grow and have the potential to grow.

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Brooke Masters
That’s really helpful. We should probably think also about people for whom, you know, they don’t have a boodle of cash. We’ve talked about people who have too much cash, but there are people who are really just scraping by. And with inflation, it’s gotten that much harder for them. What can people do to kind of build up their cash while also not making themselves nervous and making sure they have some money without overdoing it?

Moira O’Neill
Well, here in the UK, there are some of the big players in the current account market. Have some great regular savings accounts attached to them. So look out for those. Make sure you’ve got a good deal that you can save up £50 a month, whatever it is that you can afford to spare to build up three months outgoings saved somewhere securely. And please do switch for the better rates because it may seem like it’s only a few percentage here and there, but in the long run, you need to take advantage of all the better deals you can access. The frightening stat that people don’t break up with their bank. They’re more likely to get divorced (chuckles) than they are to leave their bank in the UK. And a lot of us, you know, we take out bank accounts from, you know, late teens or going off to university and then never change it. And it should only take you a few minutes to do the switch. The technology is there to make it a lot easier than it used to be, say, five, 10 years ago.

Brooke Masters
Georgia, do you have thoughts?

Georgia Lee Hussey
My experience is most people get into trouble because of the future spending that they haven’t allocated within their plan. So you know, we have our bills. That’s what we already agreed to do in the past. We have our lifestyle, which is today, which as we all know, is increasing significantly with inflation. But there’s about 30 to 40 per cent of our spending that is actually just going to happen in the future. And it’s going to be a regular and often larger purchases that we don’t see coming or we don’t know exactly when they’re going to happen. So good examples are car repairs, medical expenses, home repairs. Then there might be vacations, holidays. These kinds of big costs that are much more than the average. That tends to be what undermines people’s financial stability on the day to day. So what we often recommend is beginning a habit, even if it’s a small amount to say, put away $5 or $10 a month for that car repair that you think might happen in the next year, for the medical expenses, etc. So that when they happen, there is a little fund of money to pull from. And it’s like going back to your grandma’s envelope system of saving, but it’s using contemporary banking structures to say, “I’m going to put this money aside. And then when this bill comes, at least some of it I can cover. And so it’s this future money that I find is really the habit that our highest net worth clients with the most money to spend and people who are living on very limited incomes. That’s the thing we all have to learn how to manage.

Brooke Masters
You know, sort of stepping back, what would be the sort of top three tips you would give, each of you, to an investor who right now is wanting to sit in cash a lot, but also doesn’t want to get beaten up by inflation. So how should they approach this? And, you know, what’s the smartest things you should do?

Moira O’Neill
I think you should look at what your essential spending is over the course of a year. And you should know that figure, whether it’s for yourself or your family that you’re supporting. And then you kind of know what to base your emergency cash fund on. That’s a great starting point. If you’re the over cash saver, you’ve got this massive surplus of money sitting in the bank, I think you need to have a serious look at that and give yourself an inflation lesson. Start reading up on stock market investing. Look at some long-term graphs of the stock market and see what you might be missing out on. And think about things like, you know, could you put more money into a pension fund that you’re contributing to. Could you use Isas, which are another great tax-efficient way of saving for the future? And just educate yourself, because what it comes down to is we’re not well enough educated here in the UK about what’s possible with our personal finances and a lot of people live in denial and therefore miss out on the opportunities.

Georgia Lee Hussey
I agree with all that. It always comes down for me to having a vision of where you want to go and being clear on what your values are. So in the US we highly recommend that people have a certified financial planner that they work with. They should be for you only. If you don’t have assets for them to manage, they can be paid an hourly rate. So I would recommend it for folks who are sitting on a lot of cash, are on the side of things where they have a tendency to pile it up. It's that getting some expert advice to help with the education piece in the US is really helpful because the way that our financial system is built is it’s — in my opinion — intentionally opaque. It makes it very hard to make thorough, thoughtful, informed decisions. And so having somebody as a guide, it can be really helpful. You may only need to talk to them once every two or three years because the plan is relatively simple. You need to know where your money’s going. You need to know how to invest it. You need a little tune up occasionally. So I think that’s essential.

And I think the piece that I really want to come forward, especially in the US, is the values piece. We recommend that folks look at banks that align with their values because banking is incredibly powerful. The stat that I’ve seen is that if you have $100,000 in savings at your bank, your bank then goes out and lends at a nine times rate so they can go and make $900,000 in loans. Now, is your bank lending to minority-owned businesses and your neighbours’ small business and giving a mortgage for the folks down the street? Or are they lending it out for pipelines and giant projects that you may not support? So we recommend folks take a look at mightydeposits.com. I am in no way connected with them. We just use them all the time and they tell you what, how the bank that you are with or the credit union with how they utilise the funds of your deposits. Secondly, I would say around the values piece, I am very concerned that people are starting to move their money back to the big banks and away from the small banks when there’s no logical reason. So again, double check that you’re not . . . that you’re FDIC insured and if you’re insured, chill in the place that you call home and that treats you well enough. Those are my recommendations.

Brooke Masters
Thanks for being on the show, guys. This was really interesting.

Moira O’Neill
Pleasure. Thanks for having us.

Georgia Lee Hussey
Yeah, it was a blast.

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Brooke Masters
That’s it for Money Clinic. With me, Brooke Masters, filling in this week for Claer Barrett. I hope you enjoyed the show. If you did, spread the word and leave us a review. Money Clinic is always looking to chat with people about their money issues for the show. If you are interested in being part of a future episode and are looking for some expert money advice, email the team at money@ft.com. You could also take a peek at our website ft.com/money or grab a copy of the FT Weekend newspaper.

Money Clinic this week was produced by Zach St Louis with help from Persis Love, and our editor is Manuela Saragosa. You heard original tunes this week by Metaphor Music. And finally, our usual disclaimer. The Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s it for now. I’ll be back next week for one more episode before Claer returns. I’ll talk to you then. Goodbye.

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