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We have 1 million dollars from the sale of a farm, which we want to use to pay down land debt. But we can't make a payment until the anniversary date of July 5. Right now it is in an interest bearing checking account earning 1.7 %.

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    What's your goal? Preserving the $1M, risking it all for a chance to 100x it, or somewhere in between? – Hart CO Mar 16 '20 at 20:07
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    If your banking institution has an "interest bearing checking account earning 1.7 %." that will pay that rate on the entire balance, then what will they pay for a savings account or a CD? – mhoran_psprep Mar 16 '20 at 20:38
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    If it's already parked in an account earning 1.7%, you may discover that a savings account or short term CD (3 or 6 month) will not beat that. At 1.7%, we're talking about $4,250 over 3 months. How much risk are you comfortable taking to improve that? – spuck Mar 16 '20 at 23:20
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    How large of a down payment are you planning, and how much interest will the land debt accrue if you invest the money instead? – HAEM Mar 17 '20 at 08:07
  • Now is a bad time to invest in stocks, considering how liquid and risk averse you need to be, 1.7 is probably the best you can get. – Issel Mar 17 '20 at 12:47
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    Most people have to BUY the farm to get a payout like that. – Anger Density Mar 17 '20 at 13:55
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    What is the interest on the land debt? – AbraCadaver Mar 17 '20 at 14:01
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    @Frank My bank (Simple) hasn't lowered rates from 1.7% yet. Usually takes them a couple weeks after a Fed cut. – ceejayoz Mar 17 '20 at 14:41
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    @ceejayoz I am in Europe and haven't seen rates like that in years. I might have to send you some of my own money! – Frank Mar 17 '20 at 14:44
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    Interest rates are so low in this era it's not worth bothering. If you're getting 1.7% that is almost unbeatable, just take it and enjoy. – Fattie Mar 17 '20 at 20:10
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    @Fattie : yeah shit, $1000+ a month in work-free income almost guaranteed is like, sheeehot. If I had it, I'd just sit on that puppdog for living costs as much as possible and build from there with other ventures. It's like your own personal UBI. – The_Sympathizer Mar 18 '20 at 12:17
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    I have a Nigerian Prince that can help! – user6916458 Mar 18 '20 at 17:29
  • @user95070 Please pay close attention to what is happening in the UK now as it will repeat somewhat later in the US and Canada. Be prepared for difficult times ahead. – Frank Mar 18 '20 at 20:57
  • 1.7% on a large sum doesn't seem totally unreasonable in light of https://www.bankrate.com/banking/savings/rates/ ... however, you may want to watch out and split the money up among different banks to take advantage of federal deposit insurance as R. Hamilton points out below. – WBT Mar 19 '20 at 12:58

6 Answers6

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If you need that money for a payment 3 1/2 months away, then you need to be extremely risk averse. Maybe even to the point that you may want to spread that $1mil to several banks to stay under the FDIC limits of $250k/account. You will not get great return, but you will be sure to have it when you want it such a short time away.

R. Hamilton
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    You and your spouse can each open a savings account and have a joint savings account at the same bank. Put $500k in the joint savings account where you are each covered for $250k, and then $250k in each of the individual savings accounts. Then you're covered by the FDIC assuming your bank is eligible.

    https://www.fdic.gov/deposit/deposits/brochures/deposit-insurance-at-a-glance-english.html

     – RWP - Down by the Bay Mar 16 '20 at 21:24
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    Would it be possible to approach managers/presidents of local banks or credit unions who may be hungrier for the business? $1MM isn't huge amounts of money, but is it enough that a bank may want to court a future high-value customer? – spuck Mar 16 '20 at 23:23
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    @spuck + It's such a short term deposit that I'm not sure it has that much utility for the bank. If it was something longer term and they could actually plan to make loans off of that, then maybe? – RWP - Down by the Bay Mar 17 '20 at 13:24
  • Given the huge economic uncertainty over the coming months and the large amount of money involved, I would not consider spreading the risk among banks to be a "maybe". – JBentley Mar 17 '20 at 21:19
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    @JBentley If we get to the point where FDIC can't cover the accounts at one bank, having accounts at multiple banks isn't likely to help. – chepner Mar 17 '20 at 22:13
  • @chepner I don't understand your point. We're not talking about FDIC defaulting. We're talking about a bank defaulting and the size of your deposit being larger than what is protected. I.e. if you deposit $1000k and the bank folds, you will get back $250k. If you deposit 4 x $250k and each bank folds, you will get back $1000k. If you're simply trying to point out that there is an additional risk of FDIC failing, then fair enough. – JBentley Mar 17 '20 at 22:21
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    @JBentley RWP's suggestion, though, was to split the money into three accounts that are each covered by FDIC; multiple banks aren't necessary (though they definitely would be for amounts that couldn't be spilt among eligible accounts at a single bank). – chepner Mar 17 '20 at 22:29
  • you and a spouse can reach a total FDIC insurance cov'g of $1mn at a single bank by splitting it in the way i noted, in case that wasn't clear. there's no need to split it across banks unless you're single or have more. if FDIC insurance is no good then you shouldn't have put the money in the bank, you should have bought canned goods, a 12 gauge, and some shells. seriously. and seriously, it's not coming to that, we'll be fine (most all of us). – RWP - Down by the Bay Mar 17 '20 at 23:07
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    @RWP It says "$250,000 per depositor, per insured bank", not per account, so you and your partner will only be protected for $500,000 total at the one bank, regardless as to how you split your accounts. You need at least 2 banks here to be fully protected by the FDIC. If "we" refers to more than 2 people you might be able to get away with one bank. – WetlabStudent Mar 17 '20 at 23:22
  • @chepner Ok I see the confusion now. I was responding to the answer, not to RWP's comment. How you achieve the FDIC protection is up to you, my comment was focussed on the "maybe" part which tends to downplay the importance of doing it. – JBentley Mar 18 '20 at 00:03
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    @WetlabStudent you left out "per ownership category," where joint and single are considered separate categories. if you don't believe me check out the calculator they have on their site: https://edie.fdic.gov/calculator.html – RWP - Down by the Bay Mar 18 '20 at 00:46
  • Technically, you'd need 3 banks for a married couple to be fully insured on the amount of that deposit with interest. Also folks, FDIC will not default. They will inflate away the value of the dollar first. – WBT Mar 19 '20 at 13:01
  • @WBT Why 3? What is the significance of italicizing with interest. I agree, technically, with the modicum of interest, two banks, but why three? Read my comments above, checkout the FDIC site and the tool they provide. If I''m incorrect here I would like you to educate me, because it's relevant to my situation. – RWP - Down by the Bay Mar 19 '20 at 14:55
  • @FWP FDIC insurance is up to $250K per depositor per bank. With two depositors, that's $500K per bank. If OP has $1M principal, they will soon have >$1M when you include the bank's first interest payment, and would be beyond the limit of what FDIC insurance would cover even if splitting funds evenly between just one or two banks. OP & spouse would need to split the $1M+interest among at least three institutions to be fully covered by FDIC. – WBT Mar 19 '20 at 16:29
  • @RWP Though I see what you mean about per ownership category, and my information on that point was somewhat outdated. However, I still think you'd need >1 bank because interest pushes OP's balance over $1M, and that factor seemed to have been left out of prior consideration...which is why I italicized it. Diversity is also a good idea b/c FDIC will not necessarily be instantaneously fast if you need it. – WBT Mar 19 '20 at 16:36
  • @WBT gotcha. practically speaking, i don't know who is going to go through that headache of setting up another account at a new bank to protect the minimal amount of interest for the 3m term with rates where they are. keep in mind the utility of insuring that amount is not based directly on the amount, but on the amount multiplied by the probability of default over the term multiplied by (1 - the expected percent loss). – RWP - Down by the Bay Mar 19 '20 at 19:29
  • @RWP setting up accounts at two different banks in the US is not a major headache, especially if OP's eligibility factors are such that setting up accounts at one is not. – WBT Mar 19 '20 at 21:11
  • @WBT it's only maybe $50 of utility they're gaining though. i'd pay that not to have a headache, but to each their own. sorry, isolation getting at me. – RWP - Down by the Bay Mar 20 '20 at 01:25
  • @RWP Plus a few hundred for the intro bonus many banks offer, which incentivizes splitting even without FDIC considerations. It probably also depends on OP's local value of time: super busy with high opportunity cost, or stuck in self-isolation looking for something useful to do online? – WBT Mar 20 '20 at 13:48
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In addition to R.Hamilton's answer (upvoted), I would add that there is some not insignificant risk at the moment of financial crisis #2 due to the demand and supply shocks, (covid 19 + oil market drops ), overstretched corporate borrowing, and central banks having run out of ammo trying to keep 2007 on ice.

I think it would be very wise to split the money into separate banks for insurance coverage. Maybe look into short term term-deposits.

EDIT: Update. Since the time of posting this answer I would change the opening "not insignificant risk" to "highly probable", if not actually declaring that we are now in fin.crisis#2, opening rounds.

Frank
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    The current risks are non-trivial. Industries are shutdown across the globe and it's possible a bank can go down. You want to be covered for sure if you need the money in 3 months. – Nelson Mar 17 '20 at 14:57
  • @Nelson Plus a vaccine is a year off, and we're still waiting for the UK to do something about Covid19. When they start tightening the screws it will be too late, and watching FTSE collapse while Covid deaths jump through the roof won't be fun. – Frank Mar 17 '20 at 14:59
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Unless you want take a more significant risk, that's probably anout the best you can do.

Investing it into the market - bonds or ETFs or even shares - would give you a chance to earn a lot on it, but also to lose a lot on it. With a short time horizon like this, you would not be able to recover losses. If you had ten years, the recommendation would be to buy some ETFs and make 4-10% in average. For not even four months - take the 1.7%.

Aganju
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    Have you looked at the stock market recently? Now is dedicatedly *not* the time to invest in stocks :-) – Mawg says reinstate Monica Mar 17 '20 at 09:02
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    @MawgsaysreinstateMonica - It can go nowhere but up! – Jay Lemmon Mar 17 '20 at 09:59
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    @MawgsaysreinstateMonica it’s always the time to invest in stocks if your term is long enough. – Tim Mar 17 '20 at 10:03
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    @MawgsaysreinstateMonica Actually, last week was decidedly not the time to invest in stocks. Now, who knows? Have they gone down all the way they're going to go down yet? Or not? – user253751 Mar 17 '20 at 10:13
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    @MawgsaysreinstateMonica Irrational market price hysteria is always the right time to invest in anything. This is probably the best opportunity since Lehman went bust in 2008 (and my total ROI in 2008 was more than 30%). – alephzero Mar 17 '20 at 11:02
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    @alephzero You were merely lucky. Since 2007 the economy has been being propped up completely artificially. If Covid/oil go away now, QE is not going away ever in the current situation (yes, the half hearted QT attempt in the US backfired and was stopped), but it eventually has to tank. It's just a question of when. This Covid-19 situation however is probably going to push things back over the edge though, IMO. – Frank Mar 17 '20 at 12:36
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    Regardless of the current situation, the OP has stated their goal is to use the money to pay down debt in 3 months. They aren't looking for a long-term investment; they're looking for somewhere to park the money until they spend it. – chepner Mar 17 '20 at 13:03
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    @alephzero Yeah, unless you need the cash back in four months - now is NOT the time for short term speculation with money that OP cannot afford to lose. – J... Mar 17 '20 at 14:15
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    Indeed. My recommendation? Buy back the farm. ;) – Asteroids With Wings Mar 19 '20 at 18:56
  • I'm here waiting for someone to say "invest it in BTC!" – R.. GitHub STOP HELPING ICE Mar 19 '20 at 20:21
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Possibly, invest the funds long-term and re-finance the land debt from a position of better credit standing.

Also, close to 50% of the funds in a brokerage account can be taken out of the account on margin and institutional margin rates can be found. Then an interest-only loan can be developed such that simply future performance of the investment possibly pays off the loan. I called that situation an interest-only loan because the percentage of margin deposit must be maintained while the minimum financial drain is the margin interest.

S Spring
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Of course, I would always consult a fiduciary investment advisor. I would imagine my investment advisor would recommend investing the money long-term in a diversified allocation portfolio, possible refinance the land debt (when interest rates drop lower, hopefully soon) and service the land debt from the growth/income from the invested money.

Arluin
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  • This is indeed the best option, the stock market can even already recover at the end of the year, but it shouldn't be a problem if it take significantly longer than that: https://edition.cnn.com/2020/03/16/investing/dow-jones-stock-market-coronavirus/index.html – Count Iblis Mar 18 '20 at 05:45
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    A long term portfolio is not appropriate for a short term time horizon. – Grade 'Eh' Bacon Mar 30 '20 at 16:40
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I had $1M for 3½ months, I would put ~$900k in four 3-month CDs (if you can find them) and use ~$100k as the underwriting for a payday advance company. Getting in contact with the right people will take some work though. This could give $10-15k in gains, even considering the current economic climate.

Others might not like my idea, but you asked for opinions. As always, if you have a financial advisor, use him; if you don't; get (a good) one.

MarkMYoung
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