The Definition Of Cash Keeps On Expanding

Bar Chart Of Average Money Market ratesThe definition of cash used to simply be coins and paper currency. Then the definition of cash spread to checks, money orders, and even credit with the rise of financial institutions agreeing to hold your money for an agreed upon interest rate.

Banks and credit unions make money by making a spread on deposits. They take in your money and lend your money out at a higher rate. This is called the net interest margin, or NIM for short. The larger the spread on a larger deposit base the more money banks will make. Banking is one of the simplest businesses to understand in the world.

The main hurdle banks must overcome is that of trust. Banks need to be trusted in order to attract deposits given the definition of cash has now turned into simply numbers on a computer screen. We can all hope that banks will protect our hard earned money in good times and bad times. But when banks regularly lend out more than 5X their deposit base, sometimes bad things happen when panic strikes.

Since the financial crisis regulators have required a hike in bank’s tier 1 capital ratios, thereby lowering profitability as leverage is reduced. The side effects include lower compensation for financial services employees and much tougher lending standards for small business and homeowners.

ONE THING CASH IS NOT: CERTIFICATES OF DEPOSITS (CDs)

A couple things have made me question the ever expanding definition of cash recently.

1) Commenters on Financial Samurai and my various guest posts around the web consistently ask why I have so much cash as part of my net worth allocation even though I hardly have any cash.

2) Personal Capital, my online wealth management software categorizes all my CDs under the Cash section on my homepage dashboard. I just noticed this after going through every single line item in my net worth and updating the values and refreshing my accounts for my year end review.

At any given moment I’ve got less than $10,000 sitting in a bricks and mortar checking or savings account, which equates to one month or less of living expenses. My checking account pays 0.1% and my money market pays 0.2% with Citibank, which is why I loathe to have anything there. It’s way better to keep liquid savings in an online savings account like EverBank or Capital One 360 where interest rates go up to 1.1%. Your money is easily accessible and the bank is at least treating you with respect!

People are confusing cash with CDs. A certificate of deposit is not cash, but an investment in a stable value bond issued by the bank that promises to pay you a coupon every month, quarter, or year until maturity. If you hold the CD until maturity, you get 100% of your principal back. The special attribute of a CD is that $250,000 is guaranteed by the FDIC for single account holders, and $500,000 is guaranteed by the FDIC for married couples. No such principal guarantee exists for stocks or corporate bonds.

The proper comparison for a CD is a corporate bond. The main difference is that corporate bonds tend to have longer dated maturities, have trackable principal price movements, can be regularly bought and sold without penalty, and are issued by corporations, which are deemed higher risk. A bank issuing a CD is also a corporation, but it’s deemed lower risk, even though the bank is using your funds to lend your money out at a higher spread because of the FDIC guarantee. As a result, the closest comparison to a CD is a US Treasury bond.

When I was working in investment banking, I had to declare all my CD investments because I had to declare all outside interest investments. Declarations include buying rental property and investing in private companies. You don’t use cash to invest in a money market or checking account unlike using cash to invest in a CD. Hence, there was no need for me to declare transferring any cash to an online savings account.

LET’S STOP DILUTING THE DEFINITION OF CASH

Cash is cash, a medium of exchange with an implicit value in relation to other things. Cash does not have the ability to produce more value. If wealth management tools like Personal Capital want to categorize cash, then they should have their Cash section consist only of savings, checking, and physical currency. If they’d like to include CDs as part of the Cash section, then they should change the name to “Risk Free Investments” given the FDIC guarantee. If not, CDs should be categorized in the Investment category, where corporate bonds and Treasuries lie.

Online CD Offer: GE Capital Bank is offering a two-year CD at 1.2% and a five-year CD at 2.25%, which is not bad considering the average money market account is yielding a paltry 0.1%. If you’re looking for a short-term CD, this is as good as any I’ve seen out there. Half the battle to building wealth is safely earning as high a return as possible. The other half of the battle is protecting yourself from temptation to always spend. A online CD helps you conquer both.

Updated: 7/2014

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Maverick says

    Agree again with you Sam, CDs are not cash…the cash is locked-up. I consider cash any instrument that I can redeem for US currency by the close of the business day AND the principle is guaranteed. (I’ll define redemption as deposited into my checking/savings.)

  2. Insourcelife says

    Agreed – CDs should be treated as investment. I’m surprised to hear that Personal Capital counts it as cash. Of course, they have an interest in making you feel like that money is sitting idle so that maybe one day you decide it’s better to invest this “idle cash”, preferably through them. Subconscious conditioning and advertising, maybe.

    • says

      That might very well be the case since we all know cash is trash in a bull market.

      It’s just interesting to see the mass media and financial tools categorize CDs as cash for the post part. It’s not the end of the world to do so, but it’s different. Maybe one can call a CD “Cash+” or something.

  3. Alin says

    I believe CDs should be under the category of cash.

    I agree that has features of investment category too, however CDs can be converted to cash fairly quick ( 24hours or less for most of the banks) with relatively small penalty if it is before term.

    Another argument I will bring is: if you need cash in an emergent situation, what seems to be the most convenient, rapid and with less penalties (after checking and saving )

    • says

      You can’t convert without a penalty. That’s not very “cash-like” to me.

      Untemplater said it best down below, “The money that I have in CDs is part of my investment portfolio and not something I’m going to try and draw down if I need to pay for something in cash. Since I have the interest I earn automatically reinvested back into the CD, it’s not that easy to get that money out vs going to an ATM and taking out cash from my savings account.”

  4. says

    It’s an interesting distinction, and I can appreciate wanting a clearer, more universal definition. I think people are using cash to mean anything that is free from a risk of losing value. Hence throwing CDs into that bucket, as they’re subject to the same FDIC cap.

  5. says

    I’ve never really thought about it but I do have my CD’s under the cash section in my net worth spreadsheet that I update weekly. Not sure I agree with you though since I can break my Ally 5 year CD’s very easily and have that money within a couple days. I can’t think of an instance where I’d need $20,000 with only one day’s notice.

    Btw, anyone ever tried to get 10k of cash or more from their credit union? Ain’t happening..might not even be able to get it out of a big bank..

    • Joe says

      I work at a mid-sized bank as an anti money laundering specialist and yes it is very possible to get more than 10k out. 10k is the reporting threshold at which a currency transaction report must be completed. People try to avoid transactions over 10k because they think they are being taxed, when in fact it is just an alert sent to Fincen. Fincen is much more interested in the people who consistently stay under the 10k threshold.

      • says

        Joe,

        I’m very curious to understand more given you are an anti money laundering specialist!

        Are you saying that transferring or withdrawing $9,900 a pop, three times a month draws more red flags than if someone withdrew $30,000 at once?

        Are you saying Fincen has screens for withdrawals/transfers of $5,000 – $10,000 or something to look out for?

        Cheers

        • koe says

          It’s actually a crime called “structuring”. Here’s a bit from wikipedia; “Structuring includes the act of parceling what would otherwise be a large financial transaction into a series of smaller transactions to avoid scrutiny by regulators or law enforcement. Structuring often appears in federal indictments related to money laundering, fraud, and other financial crimes.”

          It only applies to transactions where actual cash is exchanged (i.e. not transfers between accounts). It is the bank’s responsibility to report all cash transactions over 10k to Fincen. However, banks monitor frequent cash activity below the reporting threshold in order to protect themselves from fines related to potential money laundering charges.

          To answer your question; making one large deposit or withdrawal is not really a big deal (i.e. could have sold a car, or need money to buy a car) however, 9,900 is a huge red flag. I have seen numerous people deposit 9,900 at 3 branches on 3 straight days. There is just no legitimate reason why someone would do this (except to avoid reporting). Now, to the extent the government follows up on these leads from the bank is unknown to me.

        • JayCeezy says

          pmfji, but I hope to add something relevant to this conversation. My work experience with a banking institution exposed me quite often to this $10,000 reporting limit. Cash withdrawn or deposited in that amount required a Federal reporting form to be filled out. This was 30 years ago, and the limit has not changed; the average amount of cash in the average purse or wallet is less than $40 today, as it was then.

          The reason for this law was to help track illegal activity, mostly drugs. I would have people walk into the bank, not a customer, and want to buy a Cashier’s check for $9,900. Ridiculous, the fee was $2 and it took 20 minutes of a teller’s time to do this. The risk of counterfeit bills slipped in was also very real and common. Very bad business. In addition, the buyer would have a sports bag and a companion, and you would have a pretty good idea he (always a he) was walking up and down bank row, converting the cash. btw, you cannot move U.S. currency in or out of the country without declaring it. Not so with instruments like Cashier’s Checks. Wires and account checks are of course traceable.

          This form was/is also used at the discretion of the institution, and I began requiring it for anybody that was ‘bad business’. They stopped coming.

  6. MD says

    Old – I consider that to be a small cap equity.

    While I have a ton of cash (relative to my net worth), I keep 75% of my savings in Barclays Bank (on-line) with a current rate of .90%. The rest is in Capital One 360 which is now paying .75%. We use that for our checking as well. No thank you to the bricks and mortar banks. I was with a group whose initials are WF. The fees they wanted to charge me when they took over from another bank were a complete outrage. Basically, I would be paying them to keep my money. ING was the original on-line bank we went with when I refused to be held hostage. Cap One bought them out. The platform is fantastic and extremely flexible. I have no fees – currently. That is my one big concern. I can see Capital One going that direction eventually.

  7. MD says

    I don’t consider CD’s to be cash especially now since you have to commit the $ for 2 years to earn more interest than I can earn in my on-line money market. The opportunity loss of a 2 year CD could be significant if rates rise from their current levels. Of course, you win if rates decline. At this stage I would say it is 5 to 1 in favor of rates increasing. The fact that this could happen means that CD’s are not cash.

  8. says

    I haven’t’t had much experience with CD’s so I don’t know if I would consider them cash or not. The interest rate has been far too low since I have had any money to invest so I have avoided them.

    If it isn’t cash then I would consider it close to cash since you can get access to it quickly compared to stocks, bonds, and something like gold.

  9. says

    Hey Sam,

    I think the difference is that CD’s don’t meet the traditional definition of money, that is: they aren’t divisible, portable or generally accepted. That said, they are highly liquid and extremely safe – so most people treat them as cash.

    Thanks,

    James

  10. says

    I don’t consider CDs to be cash either. The money that I have in CDs is part of my investment portfolio and not something I’m going to try and draw down if I need to pay for something in cash. Since I have the interest I earn automatically reinvested back into the CD, it’s not that easy to get that money out vs going to an ATM and taking out cash from my savings account.

    • says

      Sydney, you just made the best comment arguing why CDs are not cash! It’s all about intent. I haven’t touched my CD interest income or principle in 14+ years since I started bc CDs are part of my investment portfolio as you say.

      Cash is used for operational needs and wants. Things I’ve tried to cap or reduce.

    • says

      The only way I would consider CDs cash, is if it was due to be paid back that month. If it isn’t, or the way that you are using it, it is definitely considered part of your investment portfolio.
      If one had a CD coming out every month, then effectively the money + interest it earned would be cash until it was reinvested.

  11. says

    Jayceezy and Koe,

    Seems like the bottom line to me is that one should withdraw whatever amount they need and not care about who’s watching so long as it’s legit business. Business owners should care even less if they are transferring distributions or paychecks from their business account to a personal account etc.

    Sam

    • JayCeezy says

      @Sam, your perspective is also how I look at it. It is not an issue for any legit purpose, but legit people don’t need to deal with cash at all, anymore, and 30 years ago there was little reason to do so, either. If I was making a transaction like buying/selling a car for cash, I would do so at a branch of my bank; this way, there is video and eyewitness, and the cash will be counted with the bank’s billcounter (detects counterfeits). Can’t think of any reason to use a large amount of paper cash in a transaction, except to avoid a record. People do this when they get divorced, have a bankruptcy, or tax issues. Or, if they are criminals, like the ones Joe finds. People get up to some hinky stuff.

      In Los Angeles region, there are whole neighborhoods where restaurants, hardware stores, shoe repair businesses, etc. exist in order to launder paper currency back into electronic existence. If anyone wonders why ‘check cashing’ businesses exist, it isn’t because they make a profit on 2% of a $250 check. I have a high-school pal who works at his family’s check cashing business; he wears a bullet-proof vest to work, and makes his transactions through a sally-port in bullet-proof plexiglass. He told me some days they send 100+ wires, at $40 each. Spanish is his first language, and he goes weeks without doing a transaction in English. Just to complete that picture, he is a former lineman for USC and in the USFL, and is 6’6″. So that is a sketch of a cash business.

      Other people in my circle of acquaintanceship who operate largely in cash, include a tennis teaching pro who also strings rackets, and two comedians who have problems with liens, garnishments, and IRS seizure notices. None of these guys is married, or have the trappings of what we might think of as a ‘traditional life’. Strippers, too, but I’m pretty square and don’t know any of those.:-)

      • says

        Fascinating stuff! I’m trying to think when was the last time I needed $10,000 in cash and the answer is never! Even Moose, purchased eight years ago cost $8,000. But I wrote a cashier’s check as that’s what the seller demanded.

        I don’t understand exactly what a check cashing business does. Do they cash your check and figure out ways to launder your money and give it back to you minus the 2% fee? What’s the difference between a bank who just cashes the check for you? Reporting?

        Love learning about the cash business. So funny to go to restaurants that are cash only too because you KNOW there are two separate books!

        • JayCeezy says

          Exactly right, you, me, nobody handling their business right ever needs large amounts of cash. If we do, we fill out the form. And there is no difference to the legitimate check holder or payer, between a regular bank or a Check Cashing service. People who need a payroll check cashed at a service don’t have a bank account, let alone Direct Deposit. There may be a number of reasons for this (no SS#, illegal, avoiding garnishment/lien/child support, can’t get $100 together to open an account, etc.).

          You are not alone, most people do not understand or use a Check Cashing service, why would you? They are looked down upon, like liquor stores or adult shops, a blight on neighborhoods. People who use them also buy Lotto tickets, tobacco products, consider education optional, and are not the kind of people who will be subscribing to the next SF Jazz Center season, if you know what I mean, and I think you do. Local companies give a list of their employees, so the Check Cashing business can settle only two questions before paying out on the check: 1) is the check good?; 2) is the person who they say they are? If those answers are ‘yes’, then they cash it and take their cut. But as I noted above, that is not enough to make a business model work.

          The only people who ‘launder’ money are those who have taken money out of the electronic system. There is no legitimate reason to do that. The restaurants and gas stations and landscapers are all small potatoes to the IRS and Treasury department. The big violators are drug dealers, prostitution and gambling (think all the things Vice Squad concentrates on).

          Remittances from the U.S. to Mexico are around $25 billion a year, second only to oil exports as a source of foreign income (and above tourism). People learn this and think, “how sweet, the hardworking drywaller or restaurant worker is sending home money to their aging parents from every paycheck! Family is important to them!” Well, maybe. But when one Check Cashing service sends 100 wires to Mexico at $40 each ($4,000/day), does anyone think that money is coming from maids and janitorial workers? How many checks would a Check Cashing service have to process at 2-5% fees to make any money? Exactly. So this is what makes the Check Cashing service business model work.

          And just to make my point explicitly, the big customers making up the bulk of ‘remittances’ to Mexico are sending large amounts of drug money by international wire. At $40 a wire, there is no trace back from a cash transaction, and no account leading to a SS# and address of the sender. You will also notice that Check Cashing places also buy ‘gold and jewelry’. Who is selling gold and jewelry, in a Check Cashing business? Exactly. You can do some back-of-the-envelope calcs, and see that just one outlet can have a gross profit into seven figures a year.

          As you say, it is fascinating stuff.

  12. Alin says

    I cannot argue with any of your points. To me, CDs are still closer to cash than any other investment vehicles. Maybe the reason I see it that way is because I have significantly lower amounts in CDs than the rest of the investments and I will use them if I need more cash than I have in checking and saving.

    At the end, as long as you understand the CDs features well and your article and the comments did just that, the category you place them depends more on your vision about your finances and your plans.

  13. says

    I think it is a gray area. I see CD’s as cash equivalents. It may not fit the traditional definition of cash because you have a penalty for early withdrawal. It seems more like an investment that may have a commission to sell or may take a day to get the cash. If you were applying for a loan (particularly with the bank that issued the CD’s), I think they would view it favorably (more like cash). It is a personal decision regarding how you regard the CD’s until you apply for a loan.

  14. Sambuca says

    Two interesting things (IMHO), I thought cash was cash until I started having bank accounts in other countries. Cash in sufficiently large quantity is yet another financial instrument with ‘mass destructive’ tendencies, where you can get 3% interest on savings some places and nothing in your home country…. Soros and Rodgers picked up on the ways the global economy makes this all a game. Secondly, when you transfer money out of the US, you get a phone call ‘making sure it is you doing the wire transfer’. I’m always sending easy money out of this structure, however at 50k or less to not alarm anyone. I thought this was a free country and we should maximize our net worth, even if it’s at the expense of our fellow citizenry sometimes. Give me more ROI here and I’ll repatriate that money from Indian property and Norwegian bank accounts…

  15. Ace says

    Cash should be one of the assets in a balanced portfolio. Being illiquid comes at a very heavy price. We just survived a major liquidity crisis five years ago. The value of cash (liquidity) is very dynamic to an investor. Cash allows you to take advantage of unique opportunities!

    If other assets (equities, real estate, etc.) have negative returns, there is no reason to not hold cash. Real estate is very illiquid; you can sort of consider it a beta+ investment.

    I can’t help but feel that had more Americans maintained good liquidity levels, they would not have foreclosed on their homes.

  16. Ace says

    Sam,

    Regardless of what you consider cash, I have a few more thoughts in regards to our earlier thread.

    1. I don’t think it is prudent to keep $2 million in one bank CD. You need to diversify among eight banks in order to remain risk free. Why not just purchase treasuries?

    2. You do not have to give up very much liquidity in order to gain equity exposure. It is very easy to gain stock market exposure through call options (and put options), with very little of your networth at risk.

    3. High dividend paying stocks are a suitable alternative to your low interest rate problem (obviously with some additional risk).

    4. I understand that you enjoy the leverage of having tenants paying off the mortgages of your properties. That is how the “build wealth through real estate” game works. For more ordinary people this can be a very risky game (depending upon individual circumstances and geography).

    My thinking is that if you don’t have the personal cash flow to support the property without renters, you better think very carefully. You must have enough cash (liquid assets) to support that property for a long time. And then there are all the typical unplanned repair expenses etc.

    Another very important reason to keep “cash” or “cash equivalents” in your portfolio.

    • says

      Using call options and dividends to replace cash? And the definition of cash keeps on expanding! I definitely do not agree with you on this. This is the type of talk that happens in a bull market that gets people in trouble.

      Please remind us what is your net worth allocation currently, during 2000-2001 and 2008/2009 and whether you are coming at us as a retiree or working individual. Need more perspective. Thx

  17. Ace says

    I think you misunderstood…. Call options are for equity exposure and dividend paying stocks can be used as an alternative to your current fixed income levels, provided you maintain much larger cash levels.

    In regards to 2000/2001 and 2008/2009: I personally suffered almost no real loss and was able to take advantage of the situation as markets bottomed. Having a low debt level and strong cash position really protects you. When there is a macro economic disruption, all investment assets (outside of T-Bills and TIPS) will have correlations approaching 1.0!

    Sorry for confusing you. I just have a different perspective.

    • says

      Can you share with us how you didn’t have any losses in both downturns? Seriously, that is very impressive. Are you working now or retired? And if you are still working, is it because you love your job? I think you mentioned in a comment that you are much older than me. Thx

      • Ace says

        Well…. I would like to maintain some privacy, but yes, I can retire at any time. I like working. It adds structure to my life, it pays well, and I meet interesting people.

        Avoiding downturns…… This probably should be in the asset allocation post. It isn’t really difficult to avoid and/or minimize downturns. Basically, do the opposite of what other people do, and minimize your debt.

        Back in 1999/2000, everybody I ran into was going ga ga over the stock market. And not just the overall market. People were buying crazy things like DogFood.com or whatever. This is a very big clue that the end is near and you need to go to cash (or equivalent).

        After 2000/2001, people started going crazy about real estate. Somehow real estate became the preferred substitute for the stock market.

        Real Estate bubbles are far more dangerous. Stock markets affect rich people. Real estate affects everybody. Anyway, I don’t consider myself very smart at all, but I certainly knew that this cycle would end at some point. And the crazy financing schemes would create an expensive problem.

        I think my tipping point was a 2006 trip to Northern California. I started to see some properties in foreclosure auctions on the front page of the local paper.

        Anyway….. The point is to avoid or unload overpriced assets and replace them with “non-correlated” things. Two years ago, gold was going nuts! You could have made a lot of money shorting gold.

        Buy low, sell high… It’s not rocket science. I do enjoy your posts. I might view things differently, but that doesn’t make you wrong. We just see things differently!

        • says

          Have you considered starting a hedge fund? To never lose money during the downturns is a very good skill to have, especially if you manage a significant amount of money. What is it you do nowadays and care to share a rough net worth?

          One of my thoughts is there is much more money out there than people know. The media likes to publish doom and gloom pieces, but it seems apparent that many more people are doing much better than they say. You never lose money in downturns, real estate and stocks are at all time highs, there are folks retiring with multi-millions by age 35 and who just blog, etc. Where is the disconnect?

        • Ace says

          I’d rather maintain my privacy, so all I will say is that I have a seven figure net worth and leave it at that.

          I don ‘t consider myself wealthy but I feel very fortunate. I’m grateful to be where I am.
          I certainly do not consider myself smarter than anyone else; maybe a bit more observant but that would be it.

          I live in the middle of the country. Things are cheaper here and culture wise, we are a blend of west coast, east coast, and the south (believe it or not). Real estate is very fairly priced here.

          Over the past few years, the media has been fixated on economic negativity (That’s what they do. They are all about drama). And there indeed, are many people hurting.

          But what I have been observing for the last four years was shopping malls full of expensive imported automobiles, lines waiting to get into restaurants, and upscale grocery stores (such as Whole Foods) expanding all around my metro area. It seems like every few days I run into a Tesla Model S automobile ($75,000+). There is no way that my observations match the doom and gloom of media.

          In regards to stocks…… My current opinion (and this is only my personal opinion), I’m kind of neutral. It is getting really difficult to find good value in stocks, but if the economy continues to improve (which is the slow trend) while interest rates stay low, equities should do ok.

          Anyway… Thanks for the good thread!

  18. says

    CDs are definitely not cash. Close, but no cigar.

    Call me old fashioned, but I simply ladder my CDs with many smaller CDs rather than one or two large ones. Get slightly better interest rates than cash deposits, but lower rates than longer term CDs, but can still get gradual access to my cash without penalty.

    Any large cash purchase I’m going to plan anyway, so a few month delay isn’t a significant issue. If it’s more of an emergency, I can always pay the early withdrawal penalty, as needed.

  19. Matthew says

    Sam…

    Have you ever published a review on the “permanent portfolio” concept…brainchild of libertarian Harry Browne?…also what is your take on the
    “Infinate Banking’ Nelson Nash…before you bash it..fully understand the moving parts…the other person with a little more layman friendly version is “Bank on yourself”-Pamela Yellen….seems like the truth lies in understanding the efficiency of money—taxes/interest paid etc…anywho…your thoughts!..thx

    Matt in LA

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