Idle Cash Sitting Under the Couch Cushion

The title alone to the article makes me mad!  It has been over 2 straight months of no additional stock or investment purchase and it is very puzzling but easy to understand why at the same time.  Each stock I analyze either has a just a tad high price to earnings ratio, or the debt I am considering to pay down just doesn’t make as much sense based on the pure numbers.  What’s a guy to do?  See why I am sitting on Idle Cash and it’s building under the cushion of my couch at this moment!  Plus – see potential ideas/moves for the idle cash I have.

the idle cash

So the predicament is this – It has been over 60 days and no investment nor debt pay down has occurred, to which I have built up capital, which I am now considering to be idle cash.  More background.  As I described – I do not like my car and do have have $6.3K in auto loan remaining (prior to April’s payment) & $75K in mortgage debt (cost of my house living, most recent).  However, I also have the lofty investing goals for this year.  Here are the 3 facets in consideration/thoughts:

1.) The debate, that I am in, is I do not have enough cash on the side to pay off the auto loan in full, which has been debating with my girlfriend, friends – such as Bert, and others within the investing/pay down debt community.  The idle cash position is close, but not quite there.  However, I know it’s paying off a loan on a depreciating asset, with the loan only at 2.29%.  However, gosh would it be nice to unlock almost $300 in extra cash each month : )

2.) Further, with my mortgage – I had stated earlier that I wasn’t going to have a goal of making any extra payments on the loan, due to rising interest rates (which – surprisingly, mortgage rates have actually decreased per the bankrate.com reports on 30 year mortgages) announced by the fed.  Plus, I do plan on turning this into a rental property at some point – extra payments on this is great and all, but would take some heavy lifting to rid this debt in the short-term, as I don’t have anywhere close to $75K, so as the Duke of Dollars had an article & made a valid point about paying this off.  Check out the Duke’s article here.

3.) Then, you have the stock market.  This year to date from the S&P 500 through the first quarter, shows appreciation of 5.53%.  Not many stocks that I own are giving me a “no-brainer ‘I have to purchase this stock'”, type of feelings.  The feelings are odd, at the moment.  It appears I am not sure how to pin-point it.  Also – introducing a new stock into the portfolio has been difficult.  I analyzed Cisco (CSCO) a few weeks ago, but did not pull a trigger on them, however – they would fit the bill, except for the “Oh Crap, they’ve had so much appreciation over the last 12 months, talking 21%…  Just – “WOW”.  So here we are; 60+ days of no stock purchase as it’s been very difficult.  Target (TGT) tanked by well over 15% due to forward outlook and their strategic re-vamp of their stores, which that will take time to see the results from these actions.  

Three Questions for use of the Idle cash

Question 1: Do you think I should be investing, by using my automatic investment strategy for example, and buy a stock if it simply fits the criteria?  As in – Cisco (CSCO) – if it fits the price to earnings, payout ratio, dividend growth and yield metrics – should I just flat out buy it?  Even if it has increased like a freight train?

Question 2: Do you think I should pick one of Vanguard’s ETFs, such as VYM (Vanguard High Yield Dividend ETF), with a low expense ratio and an approximate 2.90-3.00% yield?  Not to use the idle cash in one fell swoop, but potentially making a $700-$850 periodic investment once per month to dollar cost average and continue the investment push?

Question 3: Do I simply save the idle cash, let it build up for a month more and pay off the auto loan to open up more cash?  My auto payment is $284/month and my auto insurance is around $53/month based on the premium I had received via online for my new annual amount (not yet paid, as it begins at the end of this month).  With the payoff, I will for sure open up $284 + a decrease to my auto insurance due to no longer being financed, expected to be maybe another $5/month (not sure on how much that actually impacts the renewal).  Therefore, I could, on a rounded basis, see a $290/month of new cash flow for further investments if they arise.  Anyone’s thoughts on that? 

Conclusions/final thoughts

In the end – I had a goal of increasing my dividend income by 24% from the $8,067 that was my forward amount at 12/31.  I don’t want to force myself getting there if there aren’t solid opportunities.  However, there are different ways to keep that going via the ETF.  At the end of Q1 I was 20% towards the goal and not 25%, so only slightly behind, in actuality.  Further, I have to keep in mind how nice of a position it is that I am in.  Most individuals may find it hard to save a $1, let alone having more than that to use for debt pay down or investment purchases.

Therefore, this isn’t a huge debate, as each move listed above in the questions would not be a bad move.  I try to optimize to the extreme with each and every dollar, so no surprise that I’m going through this inner-battle.  However, I would LOVE to hear from the readers out there on what ya’ll think?!

I appreciate the kind words and insight everyone!  I am sure I am also not the only one in this debatable position and am very eager/anxious/excited to see what the community has to say.  Thank you again and looking forward to hearing everyone soon : )  Keep the push on towards financial freedom!

-Lanny

 

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53 thoughts on “Idle Cash Sitting Under the Couch Cushion

  1. Even though the car loan isn’t costing you that much in terms of interest rate I think getting rid of it would be awesome since it frees up $300 per month for further investing. I wouldn’t invest it just to invest it so you can say you’re making progress on moving your dividends higher. Investing always comes down to valuation and if you don’t see something that looks attractive to invest in then the best use is to sit in cash or use for something else such as paying down your debt. At least that’s my take on it. As much as I want to start investing the combination of a relatively expensive market and debt means that debt pay down is the right move. I’d contemplate swapping only if there was a huge selloff and great opportunities, but for now that isn’t exactly the case.

  2. For me, it would depend if the cash is pre- or post tax. For the first time in several years I came in a little under the maximum allowable income so I moved cash into the IRA today for the tax deduction. I plan to deploy it into Canada to gain yield and avoid the Canadian withholding via the tax treaty. If it was post tax, unless you want to go offshore, I’d go with a combination of making extra car payments (also assisting the credit score) and an ETF while waiting for a pull back.

    • Charlie –

      Yep – this is post-tax, as I max out my pre-tax investments throughout the year, no doubt. I believe I see a trend here that it may make sense to drill out the crappy debt and then keep cash aside for an opportunity.

      -Lanny

  3. To me, it’s not about the mathematics, but what level of freedom you desire. You owe on a car, so that means someone has a certain amount of control over a certain portion of your life. Are you comfortable with that? As for me, it has been almost 4 years since making a car payment, and 1 year since making a house payment. Talk about freedom ! ! !
    Right now you have people (lenders) standing in line to take money away from you, which you gave a portion of your life to earn. What could you do if there was no one standing in that line but Lanny?

    • Boyd –

      Another deep response and thank you for it. You are right someone is in line holding their hand out for a payment on a car.

      Congrats, by the way on your own debt drill out, so awesome!

      Exactly. Screw this auto loan, putting the plan together to pay it off early and then keep cash aside in case any investment opportunities arise!

      -Lanny

  4. Thanks for linking to us and glad we could give a new perspective. You can continue saving to pay off the car note, and wait for an investment opportunity at the same time. One or the other will catch up to you and your decision will be the right one!

    • Master Duke –

      Exactly, within the next 9 months – this auto loan will either be gone or the stock market had just unloaded with crazy opps! And hey – could be both : ) Saving is key!

      -Lanny

  5. This one to me seems so easy. Pay off as much of the car as you can. U might like the car more if it has no payments. Personally I hate having any bills, if I can get rid of one without stirring the pot with the wife (cable) haha its gone. I tell ya being debt free feels great (still got mortgage). Also with market being so high wouldn’t $300 a month in future dollars sound great? You can have that money sitting under your couch waiting for the market to pull back or basically pay off your car and then have a extra 300 per month to increase your purchases in the future hopefully with a little correction. That’s not a huge loan and if you can almost pay it that’s awesome. Your car feels different when its paid for =)

    • PCI –

      Heck yah! Love the motivation you and others have brought into the responses. I honestly couldn’t agree more – I cannot wait to like the car more or at least feel different with it being paid off. Hey – the extra $300 per month will make mounds of a difference, and if no investment opportunities exist – I could always hack away at the mortgage or buy a rental property : ) All it means is more capital available for opportunities. Loving it.

      -Lanny

  6. Yet another good problem to have.

    In this instance I say invest it. If you can continue to pay the car payment and it is a good interest rate then continue to pay it. If you invested the $290 a month in freed up cash it would take 22 months to equal the $6,300.

    If it is long term money then I would want it invested quicker. Over the long haul I would say that money will earn more than the interest would cost you. If there was something major that happened and you needed to pay off the car then you tap an emergency fund or other investments. I would also venture to guess you have at least some equity in the car so you have some reserve there.

    Fortunately there is not really a wrong decision here and all personal opinion and risk tolerance.

    • SSDD –

      Thank you for the insight and suggestions! I do look at it from the high overvaluation of the market, but also that I won’t be dropping in the extra payments asap, as well. I see pros in paying it off from this: One less item, save small $’s on interest, open up cash flow, reduction of hands in my net worth : ) Cons: Opp. cost of other investments, not maximizing each dollar to its utmost potential.

      Not a bad problem to have and choosing one will put me in a better spot, regardless! Completely agree.

      -Lanny

  7. Do I read well that the interest on your car is 2.29%? If you’re uncomfortable with the stock market right now, have you ever thought about bonds? Even BND has a higher yield now than your car interest. Or if you’re looking for something bit more risky, I’m putting my bond money towards PCY with over 5% yield. Just an idea…

    • RR –

      Very interesting standpoint and one that has differed so far. I’ll have to look more at PCY – are you enjoying the yield? Downside, slightly, but not that critical is the ordinary income tax then, on those payments to you, right? Very interesting and intriguing.. indeed. Thank you for sharing, I’ll def. keep you posted on this one.

      -Lanny

      • I’m not sure how the taxes would work for you guys, but here in the Netherlands I pay 15% WHT on the distribution of PCY, which is the same amount I pay on any US stock dividend. So far I’m happy with PCY, pays me monthly and the volatility is relatively low. In the current low interest rate environment I believe it’s a good option in bonds.

  8. Lanny – First off – Thank you for this blog, it’s really helped me over the past few months get my finances on the right track 🙂

    RE: CSCO – I just bought them (I was tracking them before reading your blog)
    I work in IT, and my thought is that though it has appreciated, they have many things in the pipe that are worth the appreciation.

    The big things that come to mind are (aside from the items you mentioned in your post):

    1) Licensing their OS to white box manufacturers – Margins on software are huge.
    2) Most IT people speak “Cisco” and have various certifications, etc. When Cisco hardware needs to be upgraded or replaced, it is going to be replaced or upgraded with CSCO.
    3) Their subscription services, like WebEx (again I would assume high margin, recurring revenue) seem to be becoming ubiquitous.
    4) Management has said that they plan on returning more cash to Shareholders in the coming years.

    On top of all of that, when I look @ their historic P/E ratios, it didn’t see that far out of line given the transition they are making to hardware + subscription services + licensing… But I could be looking @ this all wrong!

    https://www.wolframalpha.com/input/?i=CSCO+historical+P%2FE+ratio

    I also keep in mind that the P/E is not only a measurement of how “expensive” a stock is, but how much its future value is. Given the initiatives Cisco is pursuing, it might not be as “expensive” as it seems.

    Again.. I could be all wrong!

    Jake

    • Jake –

      Love the deep insight into Cisco! Thought I missed the ex-dividend date, I am not counting them out, that’s for sure. Appreciate all of the knowledge based you had for us here and the deeper understanding of the industry & company that we would normally/otherwise not know of.

      -Lanny

  9. Definitely pay off the car as soon as possible. Once that is done I would lean more towards a low cost Vanguard fund. Its just to hard to try to time the market for individual stocks and you want your money working for you as much as possible.

    • Bean Counter –

      Always love the name, by the way. Right and to the point with where you stand, I dig it!! Putting the cash to action as fast as possible, it does make quite a bit of sense. Very eager and anxious to start deploying capital with the rejuvenation from the comments. I am leaning towards paying off the debt within 9 months time, if not sooner, but then ensuring I am using cash, as well to make investments where opportunities are. Very excited!!

      -Lanny

  10. You’re doing great Lanny. We’ve been in the same position for well over a year, and it is frustrating. I don’t like debt, so I’d probably be paying some down while building the cash, but that’s because debt bothers me. It actually pains me. Maybe I’d split 2/3, 1/3 between cash and debt or something. If it doesn’t bother you, then you can just make payments as usual. We didn’t/don’t have debt, so we let the cash build. It’s gotten a little absurd, but last week we did make our first long term purchase in months.

    It’s tough to wait, but it’s been the right decision for us. Some folks will tell you that cash is bad, but with low inflation and inflated asset values…..we think we’ll be reward for our patience. Have a great week
    -Bryan

    • Surfer –

      Very thankful for your post! Helps knowing you’ve been in the position before. It’s funny – I think debt that is related to an “item” or a material item that I don’t get much joy out of it… really pisses me off haha aka my car.

      At the end of each month going forward, I will be placing a few more dollars towards the auto loan in anticipation of closing it out before the year is over. I understand with the cash building – but you definitely have a more fun problem with no debt to boot : )

      Pumped that you were able to do something with it, I did see your new article come across, I’ll be reading that here shortly. Appreciate the comment and help on the matter here! Always a pleasure surfer.

      -Lanny

  11. This is a no-brainer. First, pay off your car loan. Think about it: The market is at an all-time high with little investment opportunity. You are paying 2.29% interest(the avg div yield anyway) plus have the burden of that auto loan every month. Once you pay it off, you now have $300/month to slowly invest into DGI as the volatility increases around the Trump trade.

    Mortgage: Tougher question. Your balance is extremely low. You’ll save thousands on the interest if you pay it off versus DGI due to loss of compounding. But the freedom of not having a payment – whew! Suggestion: After paying off the car loan, take whatever extra savings you have on the first of the month, which hasn’t been reinvested and put 1/3 toward an extra mortgage payment. The effect that has on principal is powerful.

    Once you turn it into a rental property without a mortgage, you will have sizeable cash flow to put into DGI, and valuations may be lower then.

    • BigAl –

      MAKING MOVES On the suggestions!!! Seriously, each comment I read, I get more and more pumped to go HAMMER on getting rid of the debt. You are right in that the average dividend yield in the market is around that same percentage, if not slightly lower.

      First plan of action for me – start getting rid of auto debt. Second step – monitor the market for opportunities. Third step – if none, allocating more towards the mortgage in the mean time, but still stock piling more capital. LETS GO!!

      THANK YOU Big Al!

      -Lanny

    • Except this may cost more due to the loss of tax deductions (mortgage interest, property taxes, state income tax) which generally only exist when there’s a mortgage.

      • That’s potentially true but it’d either have to be an already low mortgage rate(below 4%) combined with a high federal tax and state rate.

        From the other post, he has a 4.375 interest rate so unless his tax bracket so his federal + state tax rate would have to be 50% for the deduction to be a better deal.

    • Time –

      Appreciate the comment! Yes, interest is higher than the auto loan, but the obvious item for now is that I can destroy that auto loan sooner than later i.e. within the next few months. Haha and then here is the other damn personal part – having an auto loan irks the heck out of me!!!

      I want to slash all debt and build assets. I wish I could just do it all, all of the time haha.

      -Lanny

  12. I’m in a similar boat as you are. While it may not be the wisest move, I’m trying to straddle the line of paying down a little extra day with some cash reserves but also trying to seed the portfolio with some small automatic purchases (TGT, ABBV, QCOM are high on my list). The reasoning behind is almost 100% mental. If I totally halt making investments, I will feel like I’m falling behind my 2017 goals in a way but if I let my debt languish and compound even more, I will have that same feeling. Maybe a happy medium is the answer, only time will tell I guess!

  13. @Lanny – this is the dilemma most of us are facing with the market right now. The last meaningful correction happened over 14 months ago in Feb 2016.
    Why not use some of the money to pay down the mortgage (which should be 3% or higher), think of it as getting an automatic 3% dividend on that cash :).
    Put the rest in say a no penalty CD giving 1.3% returns, that way you are still making some money on your ‘idle cash’, and in case the market corrects then you will theoretically invest at a lower initial price, meaning you would end up in front at the end of the year hopefully…

    • Desi –

      Appreciate the comment, of course. And yes – the market is a fireball at the moment. I have tip toed into a stock position, but will be talking to the lady to see what she thinks on the auto loan debt pay down plan. I receive 75 bps on my money in an online savings account, so not too bad and can instantly make a stock transaction on the drop of the dime. I like that option that I have in terms of ease of a stock purchase from the savings account that I use. Appreciate the thoughts!

      -Lanny

  14. Debt free is the way to be.

    Get rid of all payments, starting with one charging the highest interest.

    Any financial book worth it’s weight will tell you can never guarantee positive returns in the market but you can guarantee not paying interest! I paid off all of my debts including a house before 35 and the freedom it gave me can not be put into words.

  15. Don’t forget you still have a fourth option. You can give all that cash to your good old buddy Daze here. Problem solved haha.

    But really, I’m with the general consensus here and feel like the car is the way to go. It comes down to what is one of your primary goals? Saving! You know that by having a higher savings rate, you will have more free capital long term to use in your investments. By getting rid of those extra car payments, you are increasing your savings rate, lowering your debt, getting rid of unnecessary expenditures (interest), and having more capital to be able to invest when the opportunity presents itself. Also the psychological satisfaction of completely paying off the car in itself is a reward.

    • Daze –

      Ah, wish I could just gove it all away! Haha, some day I can’t wait to do that!!

      I would definitely be increasing the savings rate and the satisfaction from the pschy would, I’m sure, feel amazing. Ah… just picturing it now. Pumped.

      -Lanny

  16. If I didn’t like anything I’d probably put it towards the car loan or mortgage. Getting a guaranteed return of 2% with the ability to free up cash in the future is definitely more appealing than the 1% that I’d make via a savings account.

    It will be interesting to see how the stock market moves going forward. I haven’t come across anything that has really gotten me excited. The last thing that I bought was ROL last year which jumped out as a no brainer to me.

    • Mustard Seed –

      I agree – I can get rid of the debt very shortly & swiftly – something that I just may happen to do. Looking forward to crushing down the auto loan, that’s for sure.

      CVS has recently gotten me very interested – I may have made a small initial investment into them : ) We shall see, dig deeper!!

      -Lanny

  17. I’d personally pay off the auto loan or the mortgage instead of putting it in the ETF with a comparable yield. Personally I like paying off debt first so that’s the background I come from.
    I have made several rather large ETF purchases recently just because I wanted more market exposure, but, I still have about $1500 left that I’m in a similar quandary over. I’m not ready to tie it up in assets, but, I don’t necessarily want to use it for an extra mortgage payment as we are already paying extra each month.

    • Josh –

      Appreciate the share here. I am setting up the timeline to payoff the auto loan before the end of the year, while still accomplishing other objectives. Should be fairly easy. What about other investments o/s of the mortgage? Rental real estate with cash building up? High yielding CD’s or savings? In the end – you can do some deep digging on research to find a discounted dividend stock of course!

      -Lanny

  18. Nice work on saving the cash Lanny, the auto loan may be attractive to pay out (deprecating and all + greater cashflow) though the interest rate is low and you’re paying it off already, the return will be very low. So my thoughts turn to one of my favourite Buffittisms about investing being a wonderful game bc you can wait for the “fat pitch” – you don’t have to swing if you don’t want to…My go with that kind of money would be to park it in the highest short term / easy to access savings instrument I could find, and wait for a fat pitch.

    • WFT –

      Thank you for the comment, huge help for sure. The cash is currently earning 0.75% interest at the moment, so doing the best it can while being absolutely liquid. Hmm… I hate this damn loan on a crap asset! Though the Honda Accord will live on forever, well, almost haha.

      -Lanny

      • It’s so tough at that kind of rate, I’d understand the itch to deploy. A long time quirk in australia is that online savings accounts (with real banks) earn very decent interest. e.g. at the moment, you can get 3% p.a. (the RBA [australian central bank] cash rate is 1.5%). There are even some mutual type funds earning 3.5-5% on cash and cash like securities after fees. Makes it easier to sit on the side-line, but harder to find something attractive enough considering the extra risk. Hope you happily find a place to deploy it soon enough! PS. Honda very well could last forever…!!

  19. Hi Lanny,
    I don’t like the debt, but you could get some more KO with a 3.5 % dividend. Even if the market goes down, I don’t think we will see KO with a div far from 3.6 %.
    Killepitsch

    • KP –

      Appreciate it and do you love Coke (KO)? I actually own Pepsi (PEP) just due to a “deeper” product portfolio mix. But – is it undervalued? I think their P/E ratio is a little high right now. thoughts?

      -Lanny

      • Hi Lanny,
        I have both. We are near all time highs and the P/E ratios are high, I don´t know what will happen, but I think KO is able to pay me those dividends for a long time. PEP has a yield of 2,7% and KO 3,47%. I think both are fine but KOs average 4 year dividend yield is about 3,0% and PEP 2,7%.
        I just like the safety of a A rated company with a acceptable yield.

  20. Go with number 1. Invest, invest, invest, in dividend paying stocks. Stay the course. You are a dividend growth investor at core. Forget, idle cash, forget funds, forget car loans. Keep putting money to work build up that passive income stream and eventually that car loan will be paid, idle cash will be put to good use and all will be well. Bottom line, you will always have some form of debt, long or short in life. It could be a CC bill for one month or longer, another car loan, mortgage, business loan, etc. In other words, debt will always be a part of everyone’s life to some extent whether it’s a lot or a little. Debt will be there. The key is to manage it properly and not to abuse it and get in too deep with it. Keep investing.

  21. I was just in the same predicament last week.
    I did a cost benefit analysis of whether I should pay off my car loan or invest in stocks.
    I ended up choosing to pay off my car. It’s pretty awesome to have one less loan and unlocking that extra cash per month is pretty awesome. In my case I’m unlocking $340 per month.
    The advantage is that I now have more money to buy stocks, invest in Wallet Squirrel experiments or use in an emergency. Likely though, it’ll be to buy more stocks. Hopefully when they become more reasonable to buy, everything is so high right now. #DollarCostAveraging =)
    Goodluck!
    Andrew

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