[Music] So, Bo, you're the fancy guy with the CFA. Okay, um, so you'll be able to add a little depth to this. I'm always amazed because one of the things is that people who predict what's going to happen to interest rates. Now, I will say this is a little better because we actually had Chairman Powell come on air and basically said, Yeah, I think that we've gotten to the time where interest rates need to come back down because, you know, this, this, this, and talking about inflation and so forth. So, they're pretty much showing their hand that they think they're going to lower rates. But there's been a lot of time that it is dangerous or iffy territory to be a predictor of interest rates. Yeah, it's very, very, it's a futile effort, it seems. You know, we can look back. This is anticipated rate drops since February of 2024, since the beginning of this year. They're walking through what they thought the gravity of rates would look like, the gravity of

drops, and you can see that at the beginning of the year, thought rate drops were going to happen for sure. It's going to be around 1%, and then as we got towards May, and there was poor inflation data, all of a sudden, Oh, maybe we're not going to drop at 1%. Maybe it's only going to be 25 basis points. And then as we recovered from that, now it is now increased and ticked back up. So, you want to be very careful in terms of listening to someone else's estimation of what's going to happen. We'd much rather you make your decisions based on what is perfect for your financial situation. Now, it does seem likely, though, rates are going to fall. I think most people would agree that rates are more likely to go down from this current posture than up. So, does that mean that we shouldn't hold cash anymore? If rates are going to fall and it's not going to be as attractive, I'm not going to make as much money, should I be doing that?

should I be getting away from cash? Absolutely not. Even with lower rates, even when rates and cash were trash, not paying a whole lot, there are reasons why we want to make sure that we continue to hold cash, even if rates fall, even if the environment is not as attractive as it is right now. Today, this is a great discussion because a lot of people I know, since we're about to come through this new threshold where interest rates will be coming down, will fire up the machinery of telling you once again cash is trash, and people will push you further and further out on the risk spectrum to try to maximize every dollar. And I get it. You're a financial m, you too want to maximize every dollar in your army of dollar bills. But please use me as a case example. I have how there can be too much of a good thing. I thought I was so smart that instead of having an emergency reserve, I had access to a home equity line where I had six figures worth of equity on my house, guys.

it was Fool's Gold. We all know how the rest of the story played out. Is that we had the Great Recession. I all of a sudden got a letter from Wells Fargo letting me know that that home equity line with six figures of access that they conveniently gave me the checkbook and the debit card on was completely closed off and I was not going to have any additional access to it. And here I am looking at my financial life and realizing I was missing the key component of an emergency reserves while we were facing a volatile Market while we were facing strong unemployment while we were facing the stock market losing 20%. I want you to hear me. No matter what happens with interest rates, even if interest rates go down, you have to keep your cash reserves. That's steps one, highest deductible covered, and step four, emergency reserves of the financial order of operations in liquid cash type equivalent Investments. And it's not just that. Even if rates go down, you may want to keep cash because you're planning for

a homeowner payment or you're planning to buy a new automobile, or maybe there's a big trip or a big expense like a wedding, or maybe you just recognize, Hey, there's some future opportunity I might want to capitalize on. Maybe I want to invest in a business, or I want to buy a rental property, or I want to buy a commercial building. Whatever that thing may be, cash is your friend. So, even if rates drop, it does not mean that you should not continue to hold cash. You should hold cash so long as the goals that you have align with having cash on the sidelines that's readily available for you to use. Now, just because we say that doesn't mean that you can't be sophisticated about it, that you can't think through it. Because if rates do go down, there are likely going to be some impacts that you want to know about. What will likely happen is money market mutual funds, the highest payers right now, will likely drop their yields faster than high-yield savings accounts. And while both will go down, the speed at which they go down may

not be the same. So, if you are someone who's hearing this for the first time and you have a really good high-yield savings account, and you heard this, you're like, Oh man, now I'm going to go open my brokerage account. I'm going to immediately jump into a money market mutual fund. Well, if rates do fall in September and the rates in the money market mutual funds drop precipitously, you may have been better off staying in the high-yield savings account. On the converse, if we do see rates fall and all of a sudden money market mutual funds aren't that attractive anymore, you may want to consider opening up a high-yield savings account at one of the online institutions, just like you mentioned, because that might be a better way to get a better yield on cash. We won't know until after the drops happen, but you need to be aware of what's available in the marketplace to you. Yeah, this is one of those things. I did this with my own money. The

fact that I think about pre-2022. I was heavy on the high-yield savings account when the FED started raising rates and treasury rates started going up dramatically. Um, now the majority of my cash is in those money market mutual funds. So you're going to see that we will have an intersection point once again as rates start to drop. Another thing that another likely impact that will take place is that new CDs being issued will also drop pretty quickly. Again, any CDs that you currently have will not drop, but new CD issues will drop. Now this is important. Your account value will not go down. The value of the CDs that you own will not go down. It's just the rate at which newly deposited money will earn. That's what's going to slow down. If I was getting 5% on my CD, I may now when I get a new, when I go buy a new CD, it may only be four and a half percent. So you need to understand that. And when you think about

your terms do I want a 3-month, 6-month, 9-month, 12-month, or 24-month CD? Or there are even strategies that you can deploy, and I bet your grandfather was doing this. You can even use CDs where you don't have to get it 100% right or 100% wrong. There are strategies you can build to make sure that you're taking advantage of the best of both worlds. Yeah, you hear it, but nobody ever explains what it means when somebody says they want to create a CD ladder strategy. And now, we use an example of just a non-mon CD ladder strategy, but to set it up initially, you're going to, let's just assume you have $115,000 to set it up. We did one 3-month, we did one 6-month, and we did one 9-month CD. But then ongoing, if you want to keep rolling this ladder forward, is that 3-month CD kind of came to maturity and now reset itself at whatever the interest rates are, um, as that 3D as

three 3-month CDs came mature. We'd buy another 9-month, and then when that 6-month CD came mature, whatever the interest rate is now 6 months in the future, we'd buy another 9-month. And you see how this process keeps rotating. Now, I will tell you when you do a ladder strategy, we might get to a point where interest rates are so low that you don't have to stay on this train of keep rolling the ladder forward. You can every time be taking a temperature read on where interest rates are. What this does allow you to do, though, is if you want to lock in interest rates for an extended period of time and still give you options to have access to the capital, a ladder strategy is not a bad idea. Yeah, there's some big benefits to doing this. One is you'll have funds available penalty-free every month or every quarter, every six months, depending on the timeline of your ladder. It's a great way to make sure that you have liquidity coming, so it's not uncommon for folks

that are very conservative and more risk-averse. They might say, Hey, I'm going to build a five-year CD ladder so that at every year, I'm going to have liquidity come my way, and that's what's going to cover my living expenses, or that's what's going to cover a fixed portion of my living expenses. That's great. Another thing is you can take advantage with higher or a higher rate longer CD. So, in our example, even though our goal was for three months of liquidity through the ladder, you'll notice the actual CD we were buying was nine months. Every time we were just replacing with a nine-month. You can do the same thing with 12-month or 24-month CDs, depending on the ladder that you're building. What's great is you will be buying higher and higher CDs if rates go up. However, if rates go down, your reinvestment rate risk is present. You will be buying at lower and lower levels, so you need to understand, Okay, just because I was getting 5% and I implemented a CD ladder does not mean that 5% will

be locked in, and this is just an honorable, honorable mention. You don't just have to do this with C; this can also be done with T-bills too. So, you can actually use treasury securities to implement the same type of strategy if you're someone that this makes sense for. Now, where we often see this, Brian, this is less likely to be accumulators, less likely to be people in the beginning stage of their financial journey. This is probably folks that are in the financial independence or retirement stage that are holding more cash than normal. They're not just 3 to 6 months of living expenses; they're 18, 24, 36 months of living expenses. CD ladders might be a great solution for those folks. CD ladders, but then even I'll talk about the T-bills. I mean, we've seen situations where people sell a big chunk of land or real estate, or they sell a business, and they know they have this big tax bill that's due. It's not uncommon that you buy a T-bill or you

could use a CD, but you could go ahead and lock in that return, but then know that it's going to be available when you actually need to pay the taxes or whatever it is. So, there are things beyond, I think, forever when people hear about cash, they hear about FDIC limits and things like that. And I mean, they're like, What do wealthy people do who have millions of dollars that they have to pay? That's why there are options of like treasuries and other things still considered very safe, um, you know, and stable for the long term, but it allows you to go in much larger increments than when people think about the 250, 500,000, all these limits that you have for these protections. There is another level for you to consider, um, when you get into those bigger numbers.

Is Anticipating Rate Drops a Good Strategy for Maximizing Your Cash?

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Is Anticipating Rate Drops a Good Strategy for Maximizing Your Cash?

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