Is cash in a savings account ok for the cash component?

[LGrand85]

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[AdamA]

Is holding cash in a low yielding savings account fine for the cash component?

For the purist, the answer is no.  HB advocated using short term treasuries  because in a crisis situation they are the safest place, even more so than a low yield savings account, which, in theory could default or have a liquidity issue in a crisis.

Right now, most treasury only money market funds are closed or have a very high minimum.  American Century has one that has a minimum of $2500 with an expense ratio of .48%. 

You could also use Vanguard's Short Term Treasury fund (VFISX).  The maturity of the bonds are 1-5 years.  The yield (and volatility) is a little higher, but most people on the board agree that's it's a reasonable substitute.  Expense ration is .22%. 

You might go 50/50% between the two funds b/c the American Century fund is more liquid (but also more expensive) or even consider I bonds. 

[MediumTex]

Congratulations on getting started with the permanent portfolio.

Getting started is normally the hardest part.

It sounds like using a bank savings account is something you are comfortable with and as long as you understand the differences in risk between bank deposits and treasuries, I think it's okay.

As you get more comfortable with the strategy and your holdings increase you will probably want to move into treasuries (or a treasury fund) at some point.

If you want something with no management fees, complete tax deferral until redemption, and rates higher than banks or t-bills are currently paying check out I-bonds.

[AdamA]

Adam, do you know any others that may have higher limits?

I don't, really...you might check Fidelity, or Schwab...

Why does it even make sense to put money in when the expense ratio is higher than you can make? Not sure what I am missing here... are you paying that expense fee in the event that there is a rush to t bill safety and the value shoots up?

Here's my reasoning...likely to be disagreed with by some.

To me, the low interest paid by T-bills right now indicates that dollars are in high demand.  Heck, people (most of them probably a lot smarter than me) are even willing to lose money to own them.  Why would that be?

I think it's because there is still a huge amount of deflationary pressure on the economy and a larger than usual chance that investments with higher yields may be defaulted on.  I'm not saying for sure, or even probably, just maybe, but that's enough for me.  I would feel very defeated if the vehicle I chose to hold my cash defaulted, or had a liquidity problem when I wanted to use it. That is why it is worth it to me to pay the fees associated with short term treasuries right now. 

You have to figure out how much risk you're willing to take in this regard.  Just make sure you understand the argument for US short term treasuries vs. other ways to hold your cash.  It's not a trivial difference, especially in terms of the PP.

[Gumby]

One option may be to have a savings account linked to TreasuryDirect. I've never done it, but apparently you can set up a reoccurring 1-3 year bond ladder where money is automatically withdrawn/deposited to and from the account to keep the ladder running:

http://mymoneyblog.com/how-to-build-a-t ... guide.html

[Lone Wolf]

My preference is to manually purchase Treasury bills or notes and hold them to maturity.  Fidelity doesn't charge me commission to buy or sell Treasury securities so it makes this very easy and "frictionless".  I believe that Schwab offers this feature as well.  TreasuryDirect should also work for this although I am not certain whether or not there are any hurdles to selling a note early via TD.  If you can do this through your brokerage account, that's the easiest since it means that you can raise ready cash very quickly.

I set up a 0-3 year ladder of Treasury Notes and simply hold them to maturity.  I try to keep the ladder fairly evenly distributed in terms of maturity but I don't stress about it too much.

I do have a slice of money in a "high-yield" savings account for practical reasons, too.  I like to keep my FDIC exposure reasonably low, though, just to make sure that my cash component is as liquid and reliable as possible.

I also second MT's recommendation of I-series savings bonds.  I purchase the maximum every year ($5,000 in paper bonds and $5,000 in digital bonds via TreasuryDirect.)

One option may be to have a savings account linked to TreasuryDirect. I've never done it, but apparently you can set up a reoccurring 1-3 year bond ladder where money is automatically withdrawn/deposited to and from the account to keep the ladder running:

http://mymoneyblog.com/how-to-build-a-t ... guide.html

Nice link, Gumby.  I hadn't noticed that TreasuryDirect offered this feature.  Sounds like a nice option.