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Effective cash management strategy lays the foundation for your financial plan. Cash-on-hand is necessary to meet day-to-day expenses. Next, we recommend building out cash reserves worth three to six months of your budgeted committed expenses. From here, our ultimate goal remains to direct free cash flow towards productive assets that build real wealth.

The 30-Day certificate of deposit (CD) is a cash management product that marks a transition point between your budgeted living expenses and liquid savings. Intelligent investors will appraise prevailing interest rates and inflation expectations, before taking out a 30-Day CD.

The Financial Intermediary Business Model

Banks and other financial intermediaries leverage the carry trade to turn profits. Banks take in deposits as a source of capital to make loans and investments. Net interest margin, as a percentage, is the all-important statistic for this business model. We expect a net interest margin of approximately 4% for Big Banks.

Banks offer 30-Day certificates of deposit to help secure a stable capital base. These customers will collect a fixed rate of interest for 30 days, until the CD principal is then repaid. Prior to maturity, savers may not withdrawal CD principal without taking penalties and forfeiting interest. Partial CD withdrawals are not allowed.

FDIC Insurance Coverage

In 2008, the Emergency Economic Stabilization Act raised FDIC insurance coverage from $100,000 to $250,000 per customer, per bank, in what was then legislated as a temporary move to restore confidence amid the Great Recession. In 2010, the $250,000 FDIC guarantee was made permanent.

Wealthy savers will maximize FDIC backing by taking out multiple CDs and accounts at multiple financial institutions. Ten $100,000 CDs at ten separate banks, for example, would be fully insured. One $1 million CD, however, would leave $750,000 of the amount exposed to losses through possible bank failure.

Interest Rates and Expected Returns

A 1913 Act of Congress established The Federal Reserve Board with the somewhat contradictory dual mandate of driving the domestic economy towards full employment, while still maintaining a stable price level. The Fed influences the money supply through its overnight lending rate between member banks posting reserves. The federal funds rate is a benchmark for all interest rates.

Beginning in Q1 2022, The Fed began an aggressive series of hikes to raise its overnight lending rate from zero to 5.5% to battle white-hot inflation. The Federal Reserve Board began targeting higher interest rates to stifle the speculative excesses of the COVID-19 cheap money era.

Certificate of Deposit interest rates have responded in kind, with one-month CDs now averaging 0.23% annual percentage yield (APY) through March 2024. 30-Day certificates will pay out a slight return above demand deposit checking accounts, which typically offer zero.

We expect for CDs with longer maturity dates and larger balances to pay out more in interest – to encourage savers to lock up funds for extended periods of time.

Cash Management Strategy

Conservative savers must be willing to accept minimal returns, in exchange for one-month CD flexibility, liquidity, and FDIC guarantees.

Here, opportunity cost risk is a very real concern. One-month CD returns of little more than zero appear especially meager against a frantic end to 2023 culminating in roaring 26% stock market returns for the year.

All cash management products expose savers to inflation and interest rate risks. Inflation decimates purchasing power on cash. At the same time, freshly issued securities will pay out higher rates, which significantly devalues fixed income assets already in circulation.

For this, short-term money market funds are especially popular to begin 2024, ballooning to a record $6 trillion in assets. 30-Day certificates enable depositors to roll maturing CDs more so quickly into newer, more competitive products amid a tightening environment.

Savers might explore laddering strategies featuring multiple certificates with varying maturity dates. A CD ladder allows for you to maintain an emergency fund, while also building towards medium-term savings goals, like a home down payment.