Cash, Cash and more Cash — Many choices, none of them alike! The structure of cash (and cash equivalents) is defined as any investment with a fixed value that is easy to buy and sell.

There was a time when cash was just cash. Not now. "Well there is pure cash, savings, fixed, term and certificate deposits and then there are cash funds, cash sweep accounts, and we even have enhanced cash, not to mention money market funds — which would you like?"

Ah, you had to ask, when a person makes a deposit into a savings account, he/she thinks, "I've just put another $400 away this month in that plain vanilla savings account for that trip next year, but I'm frustrated that I cannot get a better interest rate like some of those Internet banks."

Better rates are available, but with increased returns, your cash is exposed to more risk and volatility. Banks have become efficient at handling your money. They have used that efficiency to innovate, developing new products that generate fee diversification for them and more choices for you.

Cash checking accounts, often called demand deposits are non-interest producing and should keep minimum balances used only for transfer of money out of an account.

Savings accounts aren't much better in today's interest environment, but they earn a few pennies and offer convenience.

Term deposits, fixed, certificates and call accounts layer up the interest rate yield depending upon amounts and maturity dates. Banks love these because they use the dormant cash to generate additional income.

Cash does not sit idle, even in your account. It probably never did, you just didn't know it.

Enhanced cash is actually not cash, but a structure that cash is invested in. Investment managers purchase various diversified short-term fixed income securities ranging from commercial paper to government repurchase agreements to asset-backed securities to enhance (hop up) the rate of return.

Considered liquid and conservatively safe, these took a beating in this market with some investors suffering loss of principal.

Cash sweep programmes are used by managers to generate returns on cash held in investment accounts. The cash is 'swept out' overnight, invested in very short term securities such as repurchase agreements, Treasuries and the like. Cash funds are pools of fixed deposits (and other structures) designed to increase yield.

Promoted heavily by brokerage firms — there have been a wave of phone calls flooding the island at the present time touting US FDIC protection (for one million up to 100 million) if you'll only do business with them. I've decided I will move my 50 million tomorrow — yeah, right!

The pool of fixed deposits is arranged in various banks under the US brokerage firm name for each individual client up to the FDIC limit per account of $250,000. But, guess who is responsible for monitoring these accounts to be sure that they don't go over the limit? Not your overseas broker or whatever fancy title he/she is using these days. You are!

Then, there is the issue of the implicit fees charged to set this all up, and the sales pressure you will receive in the future — to invest in something jiggier (vernacular for better returns). Actually, jiggier generally means bigger revenue boosts for the salespeople.

How do banks make money? Banks do earn fees for holding cash; contrary to conventional thought, putting your cash in a bank is not free. Transaction fees, custody fees, clearing fees are explicit fees.

The bank net interest spread (implicit fee) — the rate between what you will earn on your deposit (the bank pays you) and what the institution earns on loaning money — is varied and competitive.

You don't see it, but if your deposit rate of return is lower or higher than a competitor, the difference is the spread fee and otherwise known as foregone interest.

According to Federal Reserve Bank of Chicago in a Study by Robert De Young and Tiara Rice: Interest margin income intermediating between depositors and borrowers continues to be a primary source of profits, but non-interest income products now account for almost 50 percent of new revenue.

These new products contributed to the increased volatility and risk for banks involved.

Insured deposits. There is no individual deposit insurance on accounts held in financial institutions (banks) in Bermuda. The Bermuda Monetary Authority does mandate and monitor conservative statutory capital reserve thresholds and bond structures, but these are geared to the institution, not the clients.

In the past, when I have stated this fact, individuals have vehemently disagreed with me, until they actually pick up the phone to ask their customer service representative.

Real caution here. Every time you think of jumping into some investment scheme somewhere else, you are exposing your assets and your entire financial profile to that country's tax, legal, accounting, immigration, customs, and regulatory framework.

You, your family and your estate may be subject to significant financial restrictions, taxes and other impediments in the event of a traumatic life event such as divorce or passing prematurely.

There is after all, comfort in talking to your banker face-to-face and getting the real facts. In the end, you get to figure it all out. Please try — don't treat your cash like the band Hard-Fi below.

Cash in the bank, even earning a minimum return, is better than frittering it away, day by day.

"Go to a cash machine / To get a ticket home / Message on the screen / Says don't make plans, you're broke / No, no this can't be right / I know that time is tight / I've only just been paid / Three weeks five days, until I'm seen Right...

"No, no...

"I scratch a living, it ain't easy / You know it's a drag I'm always paying, never make it / But you can't look back / I wonder if I'll ever get / To where I want to be / Better believe it I'm working for the cash machine."

Sources: Ode to Cash Machine: Words and music by Hard-Fi; The New York Stock Exchange; The Informed Investor Kiplinger; Are Money Market Funds as Good as Cash? — Jeffrey R Kosnett, March 19, 2008; Wickipedia: Net Interest Spread, Ask Questions, Increase Knowledge, Become Financially Successful

Martha Myron CPA CFP¿ TEP is a Partner at Patterson Partners Ltd and a qualified professional financial planner who specialises in tax, retirement, investment, and estate planning for internationally mobile people, multi-national families, trusts and business entities. She can be reached confidentially at martha.myron@gmail.com">martha.myron@gmail.com 735-4720 or 296-3528 The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy/ sell any investment product. The Editor of The Royal Gazette has final right of approval over headlines, content, and length/brevity of article.