Cash Management, Emergency Funds, Using Fidelity as a Bank - Frugal Professor (2022)

Thoughts on cash

I loathe physical cash.

Why? It is dirty, can be stolen/lost, and erodes in value over time. Coins are even worse. Their sole purpose is to find their way into the crevasses of my sofa cushions and cars.

We usually have about $25 or so of the green stuff in our house at any given point in time. I find $1 bills to be the most practical for tooth fairy duty (it turns out that 5 kids lose lots of teeth). $1 bills are also useful for tips to while travelling. I get anxiety when travelling and I don’t have the obligatory $1 bill for the airport parking shuttle drivers.

Digital cash solves many of the problems of physical cash: it’s not dirty, it can’t easily be stolen/lost (especially if you’re following proper protocol using LastPass + 2 factor authentication on banking sites), and won’t erode very much in value if you store keep it properly stored properly in a money market account (though many choose to earn 0% on it).

My new banking setup

Over a decade ago, when I was in my mid 20s I thought I was clever by earning 5% in my Ally checking/savings account with check writing ability. I maintained this setup for almost a decade (though interest rates shortly plummeted to close to 0% for a while). It worked great, with one limitation: I could only make six withdrawals per month (and no more than 3 of them could be checks). I went over this limit a few times, was penalized with fees, but negotiated them to zero by sobbing to customer service. Despite the decade of no fees (after sobbing), it was a pain and I lived in fear of going over the 6 transaction/month limit.

A few months ago I stumbled on this Bogleheads thread which convinced me to transition 100% of my checking/savings to Fidelity. The Bogleheads thread is a bit unruly, so let me summarize what I find to be the best banking setup in the country. Again, the Bogleheads deserve credit for this system; I shamelessly adopted it on their recommendation a few months ago. After a few months of trying it out, I fully recommend it. I’ll never go back to clunky money market accounts again.

To do so, I opened 2 accounts: Fidelity Cash Management Account (CMA) & Fidelity Brokerage. There are pros and cons of each:

  • Fidelity CMA:
    • Pros:
      • Free ATM transactions worldwide (they reimburse all fees).
    • Cons:
      • There is no way of setting the default “sweep account” to a money market fund (i.e. SPAXX).
        • However, you can overcome this by simply purchasing SPAXX once your paycheck comes in.
  • Fidelity brokerage
    • Pros:
      • Can setdefault “sweep account” to a money market fund (i.e. SPAXX).
    • Cons:
      • ATM fees are not reimbursed.
  • Either of the above:
    • Pros:
      • Debit & ATM cards.
      • Free paper checks (saving me about $13.18/lifetime in Costco boxed checks!).
      • Unlimited transactions.
      • Earn up to 2.23% as of today in SPRXX.
      • Automatically liquidate money market holdings upon withdrawing money (i.e. no need to explicitly sell).
      • Offer ability to instantly fund Fidelity investment accounts.
      • Great bill-pay capabilities.

In summary, the Fidelity CMA and the Fidelity brokerage are both very capable checking/savings accounts. However, as shown above, each of them in isolation has a limitation. However, if used together (as I do), you can overcome these small shortcomings. Specifically, I do the following:

  • Dump direct deposits (& paypal transfers, etc) into my Fidelity brokerage account.
  • This cash is immediately swept into SPAXX (currently yielding 2.05%).
    • If you are a relentless optimizer like myself, you can actively purchase SPRXX which currently yields 2.23%, if you remember to do so.
      • This technically negates the SPAXX benefit of the brokerage account since I eventually purchase SPRXX manually anyway.
  • I make ATM withdrawals through CMA for free.
  • I hold $0 in cash in CMA, but I self-fund overdrafts from my Fidelity brokerage account.
  • I write checks & autopay credit cards + utilities from my CMA but there isn’t a particularly good reason to do it through the CMA rather than the brokerage account.

With the above we’ve accomplished the following:

  • 2.05% (automatic) – 2.23% (with a couple clicks) checking account.
  • Unlimited transactions/month (unlike the 6/month through Ally).
  • Free unlimited ATM withdrawals world wide.
  • Since direct deposits are directed to Fidelity, investments in IRAs and HSAs can now be accomplished instantaneously. On the day of my payday, I can be fully invested in their 0% ER funds in my HSA or backdoor Roth (which takes 30 seconds to accomplish).
    • I maintain my taxable brokerage at Vanguard due to the superior tax efficiency of VTSAX.

Thoughts on emergency funds

Ironically, even though I earn 2.23% on digital cash, I still loathe holding it. Why? I pay taxes (22% federal + 7% state) on the 2.23% of interest, bringing my after-tax return on cash to be less than the rate of inflation. On average, you’ll do better on investments (stocks & bonds), particularly if you shelter those assets in tax-advantaged accounts.

Many people argue that cash should be held for emergency funds, but credit cards do a great job for emergencies while providing me 2.625%-5.25% cash back as well as 30-60 days of 0% interest float. Alternatively, liquidating assets works pretty well for emergencies. I’ve found the best protection against emergencies (i.e. 80mph deer collision, $7k appendectomy, etc) is not to hold $20k of cash, but instead to consistently live below my means for decades, accruing a stockpile of liquid assets in the process.

In other words, I echo BigERN’s thoughts on emergency funds; they are for chumps.

How I minimize my cash holdings

Since I don’t particularly like holding digital cash, I get rid of it as soon as possible. I’m paid on the last day of the month. On the first of the month, all of my credit cards autopay in full, helping me to get rid of this nuisance cash. After those bills are paid, I transfer every dollar except for ($1k + $2,185.20) to investments on the first of the month. The $2,185.20 is my mortgage payment which I autopay in full on the 15th of the month (this is the last possible day to do so without incurring interest penalties). After the mortgage is autopaid, I’m left with $1k in my account. This pays for piano lessons, a water bill that doesn’t accept credit cards, and whatever random school PTA events that require checks.

It’s a pretty good setup. I recommend it. Despite my lifelong desire to optimize my finances I only began to align my credit card due date with my paychecks within the past 5 years. I didn’t realize I could do so until then. Once CC bills are paid in full, it is obvious how much cash can be transferred immediately to investments (on the 2nd of the month in my case).

Wrapping it up

Cash is overrated. Money market funds are underrated. Either Fidelity CMA or Fidelity brokerage would make a great primary checking account, though both used together is the best. Emergency funds are overrated. Liquid assets are underrated. Aligning your credit card billing cycle to align with a monthly paycheck is underrated.

A few screenshots for the curious

Personal Capital screenshot of CC bills due. BoA, Citi, and (not shown) Fidelity credit cards are all due on 1st. BoA requires a phone call to set this up (slightly annoying). Simply ask for due date of credit card to fall on 1st. I recall that Citi & Fidelity can be done online.

Cash Management, Emergency Funds, Using Fidelity as a Bank - Frugal Professor (1)

Screenshot of my Fidelity CMA + brokerage setup in action.

Cash Management, Emergency Funds, Using Fidelity as a Bank - Frugal Professor (2)

To change the default sweep account in your brokerage account to SPAXX, currently yielding 2.05%, click the green “change core position” button.

Cash Management, Emergency Funds, Using Fidelity as a Bank - Frugal Professor (3)

If you use CMA + brokerage, the following 4 screenshots illustrate how to set up the self-funded overdraft. As a reminder, I store $0 in the CMA so any debit to that account will be funded by the brokerage account.

Setting up this overdraft protection is not intuitive (i.e. PITA without a guide). Hopefully the following 4 screenshots will help.

Step 1: Click “Manage Cash”.

Cash Management, Emergency Funds, Using Fidelity as a Bank - Frugal Professor (4)

Step 2: Select CMA from drop-down menu then click “Your Settings”.

Cash Management, Emergency Funds, Using Fidelity as a Bank - Frugal Professor (5)

Step 3: Turn on self-funded OD protection within the CMA. Set target balances to $0.

Cash Management, Emergency Funds, Using Fidelity as a Bank - Frugal Professor (6)

Step 4: Select the Fidelity Brokerage as the source of the self-funding OD account. Congrats; you’re done.

Cash Management, Emergency Funds, Using Fidelity as a Bank - Frugal Professor (7)

Cash Management, Emergency Funds, Using Fidelity as a Bank - Frugal Professor (8)
This is what it looks like in my $0 balance CMA account. 3 credit cards autopaid on 6/3. 1 credit card autopaid on 6/4. There is a single OD transfer inflow from my brokerage account to account for the three transactions ($12,706.63 = $9.80 + $1,949.52 + $10,747.31).

Cash Management, Emergency Funds, Using Fidelity as a Bank - Frugal Professor (9)
On the brokerage side, here’s what the corresponding transaction looks like. One auto-redemption of my money market funds (SPAXX or SPRXX) for $12,706.63. Then the corresponding transfer-out to the CMA.

One last hint. If you want to link your CMA/brokerage account to other financial institutions (PayPal, Vanguard, local bank, etc), you must click the “routing number” link to reveal the appropriate account & routing number.

Cash Management, Emergency Funds, Using Fidelity as a Bank - Frugal Professor (10)

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