What To Do With Your Cash in 2022

In this episode of our YouTube and Ancher FM channel, The Solution Point, we spoke with financial expert and Partner of Custos Family Office, Juan I. Creixell. He gave us his three pronged strategy to revolutionize how we think of our cash we have on hand. He also told us how many months in reserves for expenses to plan for and he also confirmed to us that business is indeed a team sport! Here is an excerpt of our conversation.

Here is an excerpt of our conversation:

JMD [00:00:11] Welcome to The Solution Point, where we talk about your solutions for your life, your business and the law. And again, to welcome my faithful co-host Catalina,

Catalina [00:00:25] Hi everybody great to see everybody and virtually.

JMD [00:00:29] All right. And so, you know, you guys, if you’ve been here before and you like solutions, click the Subscribe button, click the Like button, click whatever you need to on your different pod-catchers so that we can make sure that we can get this message out to as many people as possible. Today, we have a very special guest. He’s got a solution that a lot of us need help with. And I don’t want to give too much away because we did talk a little bit off camera. Today we have one crucial solution that he has for us. But first of all, one, tell us a little bit about yourself, what you do and what’s going on, of course.

Juan [00:01:17] So first of all, thank you for having me, Michael. Kathleen, it’s a pleasure being with you. I am Juan Creixell and I am a money manager by trade. I’ve been in finance all of my career. I initially started with the Old Chase Manhattan bank, so this takes me a little bit. And then I, as the bank went through different mergers, I was with JP Morgan. I was the head of investment for central and South Texas, and now I manage a family office.

JMD [00:01:58] But just before we get into the question, tell us a little bit about what a family office is, because I think that’s a pretty new term in the industry, or maybe it’s not, It was new to me when we first started talking.

Juan [00:02:15] So the best way to think about a family office is we’re all very used to companies having a board of directors, right? And they help to make decisions and access the right resources for a company. A family office does that for individual right. So, everybody’s used to having their lawyer, their accountant, possibly someone helping them with their finances. We bring all of that together and we create a board of directors for families. And so, we will partner up and you and I partner up on a couple of families and we partner up with a client’s accountant. So, we help them not only with their strategy in asset management, money management, but we also help with the strategy on their estate planning and on their taxes. A lot of clients may own companies, so we help integrate that. And so really, it is a board of directors for individuals, right?

JMD [00:03:25] That’s really great because I always say and I’ve said it in my books, that business is a team sport. You need to have a team. Thanks for clarifying that, especially for our viewers and listeners, because that’s a new term for me, and I think that’s going to be a good business model. Moving forward. So, let’s get to the problem and the solution. Why don’t you share with us what problem you found the solution for?

Juan [00:03:54] Absolutely. So regardless of your wealth level, a problem that we all have in the current economic environment is low interest rates, right? And what to do with our cash. Right now, the Fed has really punished savers by having interest rates as low as they have been, really since 2008. Before you could save money and they will pay you for it. After the 2008 depression, they think they wanted to encourage people to invest. But people still have cash. And so, I always get asked, Juan, what can I do with my cash? How can I do a little better? So, I’ll tell you a little bit about some of the strategies that you can implement.

JMD [00:04:54] OK, well, that sounds good, because I know with a lot of the stimulus, you know, a lot of people have some available cash that’s just kind of sitting there and it’s a question of what do you do with it? Because it’s not keeping up with inflation right now.

Juan [00:05:15] Exactly. And so especially coming out of COVID with the market now at all-time highs, people are a little bit more hesitant to pull the trigger and invest. And so, my first take on it is you should always consider your own goals. Talk to your financial advisor and they will help you put a plan in place. But for the people who have cash? First of all, we have to revolutionize the way we think about cash. Cash is not all the same. You have to think about cash in three different ways. The first one is your day-to-day cash, right? And that is cash that you may need at a moment’s notice. You’re paying your credit card. You may have an expense that comes up and you need to have access to at that moment. The second one is reserved cash. This cash that you may not need for nine to 12 months. Cash that you will know a week in advance before you need that cash, right? And so, if you’re planning a trip but you don’t have to pay for it or taxes in April or you are planning on buying that home but is not for some time. That is reserved cash. The third piece is investable cash, right? And this is cash that you truly want it to be cash, but you really won’t need for 12 to 18 months, so you can kind of put it away for a little bit longer. And the real trick to it, Mike, is even though you have to think about it in three different ways, eventually, what you want to get to is to have a blended yield for all your cash. So, some of your day-to-day cash will earn very little. Some of your investable cash will earn a little more. The trick to it is look at it all combined and I will give you some specific ideas on how to implement to meet those individual buckets. Then that will be become a full strategy.

JMD [00:07:41] Yeah. One of the things just to +1 on what you’re saying; I think COVID and shutdowns and all of that has kind of made everybody really think about how much do you really need day to day. Because when you couldn’t go to Starbucks every morning to spend $5 for coffee, well in a week, you had $25 bucks still in your pocket. And so now you have to kind of reevaluate your actual needs to spend cash. I think there was an article in The Wall Street Journal yesterday talking about how when people move back home from kids, move back with their families, their whole outlook on how they were spending money changed. The day to day, I think, was, you know, drastically reevaluated and then having reserves, people are now thinking about having reserves because I know, like in the 80s, it was “spend as much as you can as fast as you can” because the world’s going to end. And then having the investable cash. So, I think that’s great. Tell us a little bit about how to how to position our funds to take advantage of your strategies.

Juan [00:09:09] So everyone’s a little different. But if you are like most people, you want to have probably about two months’ worth of expenses, right? And there are people who live paycheck to paycheck, and that’s fine, that is a strategy. But if you can kind of first put together one or two months, that is a good enough buffer. Now again, if we have a little bit more cash. Then what you start doing is, first of all, the first step for the day-to-day cash is a money market, right? And the money market will pay you probably nothing. But again, you need that money right away. Now there are some fixed income vehicles. Right now, we’re in an environment where people are starting to expect the Federal Reserve to start tapering, which means taking some money out of the economy and possibly even a year interest rates to start going higher. And when interest rates go higher, the value of bonds goes lower. But that’s not the case for old bonds. There are some bonds that actually appreciate when interest rates go higher. So, what does that look like? That looks like a floating coupon bond, right? As interest rates go higher, the coupon will adjust higher, and the value will go up. Another one is mortgage-backed bonds, right? So, think about the dynamics of a mortgage. When interest rates go higher, you are less likely to refinance your home, right, because you’ll be paying more. So, if you’re less likely to refinance your mortgage, there is more likelihood that you’ll keep paying what you have. And so, the value of a mortgage goes up, right? And that is kind of the opposite. When interest rates are going lower, you’re going to refinance. So, the people who own that mortgage will not get you your interest, they will just get the lump sum. So, the strategy now is to be able to combine some of those bonds that appreciation according to your needs. Right. And some of these bonds can be purchased individually. Right. Some of them cannot. Or it’s harder. You need a much larger amount, but you can always find mutual funds that will invest in a very specific class. So, there is a mutual fund that invests only in corporate floating rate bonds and loans. There is a mutual fund that only invests in mortgage-backed bonds. There is a mutual fund that I love that invest in floating coupon treasuries for those people who are very risk averse. And you only want to buy a Treasury. So, another type of bond that normally appreciate in a rising rate environment is a mutual fund that will invest in bank preferred. So, you think about a bank preferred bank. A simple explanation of their business model is they will capture your deposit. And then pay you very little and then they’ll turn around and lend it to someone else in charge of more. Right. And so, a bank preferred is our preferred equity issued by a bank. But banks make more money when interest rates go higher because they’ll still pay you very little, but they’ll charge more of their loans. And then finally, corporate bonds? Right. You are lending your money to a corporation. And there are some very safe corporations like McDonald’s Coca-Cola that have the highest rating. And then there are smaller local companies that may pay you a little bit more. But what’s important to think is interest rates go up when the economy’s doing better. Right? And so, if the economy’s doing better, these corporations have a higher likelihood of repaying their debt. OK, so those are the tools that you will use in the strategy. Now the key to this is, as I said, to do a combination of that right? And so, you can start with something that is very, very safe and it depends on the investor, the listener’s risk appetite. We can start with a little money market. Let’s say, let’s say you have $100. Fifty dollars in a money market and fifty dollars in. Just the floating rate coupon Treasury mutual fund, and so with dad, that’s floating rate adjustable Treasury Mutual Fund will pay you around 50 basis points. So, if you do 50 dollars in nothing in 50 dollars, it’s something that pays you 50 basis points. What you’re doing is now 25 basis points, already doing a little better than nothing, right? And so, you can now start introducing a corporate bond mutual fund. So, a corporate bond again, think McDonald’s, Coca-Cola? That one will pay you around one and a half percent. And so, if you divide it a third, a third a third, right? Well, now your blended gets almost closer to 75 80 basis points, almost one percent for cash daily liquidity. Well, that’s pretty good, right? And you can go there and start introducing other type of mutual funds, or you can buy the individual bonds. You can buy municipal bonds. Municipal bonds are tax free and then you have a little bit of bank preferred gender, so you can actually get to about one and a half. And maybe by this time you’re only putting out $100, about ten dollars in the money market. And then you separate the other 90 dollars, and so you start playing with the risk and the interest rate that you get. And we can get to one and a half almost two percent of yield, which is really pretty good. You got to think that the 10-year Treasury today, it got to about as high as 162. It’s come down to 153, but you almost have to own it treasuries for 10 years to get that right. So, this is an elegant solution to a simple problem that if you do the right medicine in combination, you will get the right yield at the right risk profile for your listeners.

Catalina [00:16:41] How receptive have your clients been to this idea and how long have you been implementing this strategy?

Juan [00:16:49] Well, I’ve been I really started thinking differently about cash in 2010, 2011, as the Fed was bringing their interest rate to zero and people had a lot of cash and there was still a lot of uncertainty. And I think this strategy of the way I think about cash and the way I help clients to put a portfolio together for their cash that will align with the risks. So, I’ve been doing it now for almost 10 years. And it’s funny in those 10 years, the economy has done really, really well. And then COVID. And but the one constant is people are always nervous because there is always something. Maybe it’s the election. Maybe it’s there is always some level of uncertainty. And so, to be strategic, you can do a little better and even get close to inflation. So yeah.

JMD [00:17:53] And again, Juan this is just your cash part of your investment. So, this is your cash that you have in a form that you can access it quickly. You know, this is not talking about long term investment for retirement. And so, you know, that just kind of builds up another layer. But it sounds like you, you have a similar strategy when you get into this, this chunk of investable cash that maybe you don’t, it’s not investable cash, but we want to start doing investments. So, then you start blending maybe more equities because now you want a higher return, but you also are looking at higher risk.

Juan [00:18:50] Exactly, you really start getting into portfolio construction for the overall assets that an individual or a family will have. We’re not even talking equities right now. We are still talking about only fixed income, fixed income that can go up in value as interest rates go higher. But it’s still cash.

Catalina [00:19:15] I can imagine, too, before you even decide where everything is going to go, you need to do kind of a personal or a family assessment of what you spend on or how much day-to-day cash do I really need? Have there been some wake-up moments with your clients? They’re like, No, no, no, we just need this much. And then they realize, No, I need this. You know what I mean? That when they finally go through the exercise, they realize that they were off the mark. And maybe that was a good enlightening experience.

Juan [00:19:44] Absolutely. That’s a great question, Catalina. So yes, I can think of several examples were. Money in cash is such an emotional aspect.And so, people want to kind of hold it, keep it close to their chest, your savings and when am I going to need it? But then, when you help someone put together a budget and you say, OK, let’s keep together two months, OK, let’s keep together three months’ worth of your expenses, or let’s keep together nine months. Let’s think about your day-to-day for nine months, and we’ll set it aside in a money market, the minute you need it, it will be there. And it’s a dollar in, dollar out. Then people breathe a little bit easier and say, OK, well, now with this amount, we don’t need to have the two hundred dollars, for example, we only need this much, and we can take a little bit more risk and that will pay us more. And that means that the overall combination of the two starts becoming more. People always have in mind: tuition, new car, the rent, the utilities. But then you start thinking like, well, the new car is by not going to be for a year and tuition may not be until my kid is in college and it helps to be organized and putting together a budget that becomes the foundation to build on these strategies.

Catalina [00:21:23] Very good. I can just see myself and well, I’m more the internal operations person, right? So, it’s like, OK, yes, I put that cash away, but if I needed it, which ATM do I use and where do I pull that money out of? But it’s like you said, it’s very personal. People want to still be able to feel that they can touch their money.

Juan [00:21:43] Yes, exactly. But they also want to see a little bit grow.

JMD [00:21:48] I think that’s one of the big things that everybody has to do is address how much cash do I need to have access to? I see that sometimes, with my clients, that they have a huge war chest in their company. And I’m like. Why do you need that much cash? Well, I want to be able to buy a tractor and I want to just be able to cut a check and buy it. I’m here like, Well, is that really the best thing to do and have this in your operating business with the highest risk? So, we start having those same conversations of maybe moving cash out of a higher risk pool that’s not getting any interest and it’s creating a target liability.

Juan [00:22:46] Yeah, absolutely. That’s great point. And maybe you will buy a tractor in the next nine months, but you don’t need to have the value of three tractors that might leave enough for one job, right?

JMD [00:23:00] Right. And that’s kind of the conversations that the I think people need to have with their different team of advisers to say, “Well, these are my goals and I want to be able to do that and then kind of have the realization, well, you may be better off leveraging it with interest rates so low, because you could almost be making interest because it’s such a low price, compared to what you will be able to generate.

Juan [00:23:36] You’re introducing a whole new variable where a lot of people have the cash and then they’ll ask you, why do I need to borrow? And leveraging is not because you have to. It’s a very useful tool, right? And so, a lot of our clients don’t borrow because they have to. They borrow because it’s a smart thing to do.

JMD [00:24:02] Yeah. So that’s great. This is very enlightening conversation. What to do with your cash. And what I really appreciate with your answer, like you said, this is a very elegant answer, is that this could be something that I can show our kids and they do our editing. So, they’re going to listen to this, and they may say, OK, well, I have $100. How can I do that, what he is talking about? It’s something that’s accessible to pretty much everybody. I think that’s what’s, it’s just a matter of how many zeros do you want to add to the end of those hundred dollars? Then how much do you feel needs to be in cash?

Then how much do you want to move to the next level?

Juan [00:25:00] Exactly. Put it away for the long term.

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