For the first decade of my adulthood, I had little reason to investigate how to be productive with cash. First, as with most people in their early twenties, I didn’t have much money. Try getting someone excited about interest rates when they only have a few thousand bucks. Second, in 2007 the Federal Reserve embarked on a ruthless campaign to turn cash into trash. They succeeded when they drove short-term interest rates from 5.50% to 0%.

Within a year savings accounts morphed from Scarlett Johansson to Ugly Betty.

The once juicy income stream doled out by CD’s, T-Bills, and savings accounts dried up. Cash did maintain a few attractive qualities though. Like optionality, for instance.

Optionality

Cash is like a call option with an unknown strike price and no expiration date. It gives you the right, but not the obligation, to buy something (anything!) at any price … forever. Of course, you won’t exercise your “cash call” unless the cost of the asset becomes attractive. Whether it takes six months or six years, you can hang on to your option until the time is ripe to strike. Maybe you’ll end up buying stocks 50% off their highs or gold 60% off its highs or real estate after a massive recession. The possibilities are endless, but only if you have cash available.

And here’s the kicker. Unlike a regular call option that carries negative theta, cash has positive theta. You get paid in the form of interest while you wait. Unless of course, those stingy Fed governors push rates to zero. If you think about it

Rates, on the Rise

I’ve already tackled the details on how rates have risen back to attractive levels (see here and here). But I want to add a few more thoughts. First, the higher interest rates climb, the more ignorance is going to cost consumers. And all it takes is a google search to solve.

Riddle me this. Why with T-bills yielding 2.4% are JPMorgan Chase and other large banks keeping the interest on their savings account at zero?

Answer: Because they can. Do you think banks would keep it at zero if they had informed customers that actually compared rates and put their money where it was treated best?

No! The stampede of cash fleeing these big institutions would demand they raise rates to halt the flow and actually offer something more competitive.

My goal and the one I suggest you adopt is to maximize the return on any and all cash. I want my dough to be what a government wants its citizens to be – productive, not idle. Idle cash is the worst.

These days there are many places you can go to ensure your cash is hard at work. I highlighted a few in the article linked to above. In a future article, I’ll even share how I participated in a bond auction for the first time ever this year.

Bottom line: If you’re not getting at least 2.20% on your savings, then your cash is being lazy. So whip it into shape and stop living beneath your privileges.