How to Handle Cash: Warren Buffett's Approach

July 02, 2024

Recently, my sister-in-law asked for advice on where to place some extra cash. She wants to keep it accessible, avoiding investments due to potential short-term needs. This is a common question, and it's a crucial part of managing one’s financial profile.

Cash Management: The Buffett Way

Effective cash management is essential, especially on Wall Street. Allowing cash to sit idle means missing out on potential gains, while a poorly managed cash investment can have serious repercussions. No one understands this better than Warren Buffett, one of the most renowned investors of our time.

Buffett’s holding company, Berkshire Hathaway, holds an astonishing $163 billion in cash, as of its 2023 annual report. To put that into perspective, only four U.S. banks have a higher net worth, and three of them are currently under scrutiny by the FDIC, which is urging them to revise their crisis plans.

While FDIC insurance protects everyday depositors like us, Buffett’s need for a safe haven for his vast cash reserves is paramount. His solution? The U.S. Treasury. Buffett places 80% of his cash in U.S. Treasury Bills (T Bills), with the remainder in various business-related accounts.

Why T Bills?

T Bills are the shortest-term, most liquid Treasury instruments, typically maturing within one month to a year. Buffett likely employs a T Bill laddering strategy, where cash is divided across various maturities, ensuring a steady stream of cash flow as the bills mature. This method allows him to ride interest rate fluctuations without the need for precise market timing.

For example, with $120,000 in cash, you might invest $10,000 in T Bills maturing each month, creating a ladder. As each bill matures, you roll it over into a new T Bill, capturing the current interest rate. This strategy has served Buffett well, especially as T Bill rates have climbed from 0.25% to nearly 5.5% over the past few years.

Alternatives for Smaller Budgets

If T Bill laddering seems too complex or out of reach, consider alternatives like Government Money Market Funds, high-yield savings accounts, or Certificates of Deposit (CDs) from reputable banks. Websites like bankrate.com can help you find the best options.

Interest-rates for 3 month T Bill (red), 5 year Treasury Note, and 10 year Treasury Note. Normally T Bills have the lowest interest rate (shortest maturity). Currently the Yield Curve is inverted, this has usually meant a slowing economy ahead (and lower interest-rates).

The Bigger Picture: Interest Rates and the Economy

A quick note on the current state of interest rates: Typically, shorter-term securities like 3-month T Bills have lower interest rates than longer-term options like 5-year T Notes or 30-year T Bonds. However, the yield curve has been inverted since 2022, with short-term rates exceeding long-term ones. This inversion often signals a slowing economy and potential future rate cuts.

Despite Wall Street’s predictions, the Federal Reserve has yet to lower rates this year. However, many analysts still believe rate cuts are on the horizon, possibly making now a good time to lock in higher rates.

I hope this gives you a solid understanding of how Warren Buffett and Wall Street approach cash management.

Current Rates

T Bills 5.10% — 5.48% (1)
CDs 2.5% — 5.4% (2)
Savings Accounts 1% — 5.25% (2)
Money Market Funds 2.5% — 5.30% (2)