PaulB16 (Texas)
Posts: 1
Posts: 1
Posted:
I want to know what and how you are investing your reserve fund to get the most return on your money.
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Reserve Fund Investment
Started by PaulB16 • 9 replies • 468 views
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CathyA3 (Ohio)
Posts: 6,299
Posts: 6,299
Posted:
The issue that boards run into is that there is a trade-off between risk and return. The primary goal for reserve funds is preservation of capital so that the money is there when you need it - return comes after that.
This means that you will be limited to things that currently aren't providing much in the way of income these days: ie., money market accounts, CDs, Treasury securities, and the like. I don't see that changing any time soon since the Federal Reserve appears determined to keep interest rates near 0. Laddering CDs is a good way to achieve higher returns while still having money available when you need it. Ask the company that does your reserve studies to provide the data in a spreadsheet, and you'll be able to see how long you can safely tie up your funds.
You'll want to have FDIC or comparable insurance on this money, so be aware of the limits on that.
Credit unions often provide a higher rate of return than banks do, so shop around. They can also be easier to deal with, although they may not provide the same easy access to your money that the big banks do. Credit unions also carry NCUA insurance, which is similar to FDIC insurance.
There are legal ways to get around the insurance limits. Some of the bigger banks provide programs that actually spread the money around to other institutions while giving the customers the convenience of dealing with only one bank. Some credit unions may also carry supplemental insurance that will insure funds up to $500K.
Be aware than money market *accounts* are FDIC-insured, but money market *funds* are not.
In addition, brokered CDs (CDs bought on the open market through a brokerage firm) can experience loss of principle. People may be tempted to go this route to achieve a higher return on their money, but here the risk-return issue can nail you. You want to buy new-issue securities and hold them to maturity (the same with Treasuries).
This means that you will be limited to things that currently aren't providing much in the way of income these days: ie., money market accounts, CDs, Treasury securities, and the like. I don't see that changing any time soon since the Federal Reserve appears determined to keep interest rates near 0. Laddering CDs is a good way to achieve higher returns while still having money available when you need it. Ask the company that does your reserve studies to provide the data in a spreadsheet, and you'll be able to see how long you can safely tie up your funds.
You'll want to have FDIC or comparable insurance on this money, so be aware of the limits on that.
Credit unions often provide a higher rate of return than banks do, so shop around. They can also be easier to deal with, although they may not provide the same easy access to your money that the big banks do. Credit unions also carry NCUA insurance, which is similar to FDIC insurance.
There are legal ways to get around the insurance limits. Some of the bigger banks provide programs that actually spread the money around to other institutions while giving the customers the convenience of dealing with only one bank. Some credit unions may also carry supplemental insurance that will insure funds up to $500K.
Be aware than money market *accounts* are FDIC-insured, but money market *funds* are not.
In addition, brokered CDs (CDs bought on the open market through a brokerage firm) can experience loss of principle. People may be tempted to go this route to achieve a higher return on their money, but here the risk-return issue can nail you. You want to buy new-issue securities and hold them to maturity (the same with Treasuries).
AugustinD
Posts: 5,144
Posts: 5,144
Posted:
Quote:
Posted By PaulB16 on 12/16/2020 2:40 AM
I want to know what and how you are investing your reserve fund to get the most return on your money.
I want to know what and how you are investing your reserve fund to get the most return on your money.
JohnC77 (California)
Posts: 562
Posts: 562
Posted:
Quote:
Posted By PaulB16 on 12/16/2020 2:40 AM
I want to know what and how you are investing your reserve fund to get the most return on your money.
I want to know what and how you are investing your reserve fund to get the most return on your money.
What kind of money are you talking about?
GeorgeS21 (Florida)
Posts: 3,808
Posts: 3,808
Posted:
We go for best return on CD or insured interest accounts:
- ladder CDs if you can stay under FDIC total insured amounts
- ICS , the Insured Cash Sweep (Insured Cash Sweep is a smart way to secure large deposits while maintaining access to and earning interest on funds placed into demand deposit accounts and money market deposit accounts. Deposits placed through ICS are eligible for multi-million-dollar FDIC protection that is backed by the full faith and credit of the United States government)
- CDARS , the Certificate of Deposit Account Registry Service (CDARS is the most convenient way to access FDIC insurance on multi-million-dollar CD deposits and to earn CD-level rates, while working with directly only one financial institution)
- ladder CDs if you can stay under FDIC total insured amounts
- ICS , the Insured Cash Sweep (Insured Cash Sweep is a smart way to secure large deposits while maintaining access to and earning interest on funds placed into demand deposit accounts and money market deposit accounts. Deposits placed through ICS are eligible for multi-million-dollar FDIC protection that is backed by the full faith and credit of the United States government)
- CDARS , the Certificate of Deposit Account Registry Service (CDARS is the most convenient way to access FDIC insurance on multi-million-dollar CD deposits and to earn CD-level rates, while working with directly only one financial institution)
GenoS (Florida)
Posts: 4,276
Posts: 4,276
Posted:
Quote:
Posted By PaulB16 on 12/16/2020 2:40 AM
I want to know what and how you are investing your reserve fund to get the most return on your money.
I want to know what and how you are investing your reserve fund to get the most return on your money.
We've got over a million in our reserve accounts. Last year we were able to find banks that would give us a couple of percent interest. Not this year. This year we're back to earning a fraction of a percent on deposits. You should look into laddered CDs.
JohnC46 (South Carolina)
Posts: 14,265
Posts: 14,265
Posted:
The BOD must assure there are no loss of funds thus usually one should only use CD's, not investments of any type.
GeorgeS21 (Florida)
Posts: 3,808
Posts: 3,808
Posted:
Some money products with insurance are not CDs, but are offered by major institutions like CIT, that service associations.
MarkM19 (Texas)
Posts: 1,459
Posts: 1,459
Posted:
Cathy,
You could have dropped the Mic after your detailed answer.
Paul,
If you have a recent Reserve Study it should outline what your expected expenses are for the coming year and every year for the next 25 years. Use this as a guide for how much liquid cash you need in the reserve account not in CDs. You also will be probably putting new funds transferred into the cash acct. either monthly or quarterly. These new funds can typically be used to do the laddering of CDs in the future. Just remember your Fiduciary Duty is not to make money investing those funds it is to protect them with minimal or no risk.
Good Luck
Mark Mc
You could have dropped the Mic after your detailed answer.
Paul,
If you have a recent Reserve Study it should outline what your expected expenses are for the coming year and every year for the next 25 years. Use this as a guide for how much liquid cash you need in the reserve account not in CDs. You also will be probably putting new funds transferred into the cash acct. either monthly or quarterly. These new funds can typically be used to do the laddering of CDs in the future. Just remember your Fiduciary Duty is not to make money investing those funds it is to protect them with minimal or no risk.
Good Luck
Mark Mc
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