Negative Cash

Up until about a year ago I was against debt. Most debt I had encountered was opportunities to buy things one couldn’t afford, which didn’t appeal to me, or situations I couldn’t make use of, like borrowing to finance business activities that would return a profit.

Recently, though, interest rates have dropped so low that it’s very easy to make good use of debt. With rising inflation it’s now against one’s interest to hold cash, so for the first time in my life I am negative cash, meaning that the balance of my cash accounts (banks and brokerages) is negative on purpose.

There are annoying technical reasons why I can’t do this, but in an ideal world I would be at zero or negative cash on every account. If this sounds scary, it might be because you’re scared of the wrong things.

The most basic example of why you should be negative cash is this: you can borrow cash for 1% and reinvest it in stable safe investments to make, say, 8%. That means that if you could borrow $100k, you could get $7000 per year with almost no risk. For this reason, you should probably borrow as much cash as you can at low rates and invest it at higher rates.

I have a personal connection to a real estate developer who pays me a guaranteed 8%. I know him well and have seen many examples of his integrity and character, so I characterize this as a zero risk investment (other than the risk of not being able to access my money, since it’s a fixed term loan). Anyone could buy stable coins and earn interest on them, which I would also characterize as extremely low risk.

If you buy that premise, that you can net 7% on borrowed money, how much money should you borrow? As much as you can borrow without incurring negative consequences. That number is probably larger than the amount of cash you’d have sitting in your checking account, thus you end up with a net negative cash balance.

The primary way you get this borrowed money is by taking portfolio margin loans against stocks. If you have any non-retirement stocks you should move them to M1 or Interactive Brokers and take a margin loan against them. Interactive Brokers charges 1.6% or less and M1 charges a bit more. Stocks can and do go down, so you don’t want to borrow too close to your limit.

I go a step further and use Interactive Brokers as my main bank. Credit cards are automatically paid from it, increasing my negative cash balance every month. Income goes into it, which offsets the cash balance. I have an ATM card that gives me cash and increases the negative balance.

It is really scary to see a huge negative cash balance at your bank at first, but eventually you get used to it.

Anything that you could pay cash for, you can also try to finance. For example, I always paid cash for cars in the past because I believe you should never buy a car that you can’t pay cash for. But just because you can pay cash doesn’t mean that you should. Rather than using $15k in cash or taking up margin that could be used for investments, I financed my car at 3%.

I don’t keep an emergency fund, since that’s just uninvested cash. If I needed cash for an emergency I’d just pull it out of the margin account.

The danger of debt is that it allows you to buy things you can’t afford. I would never do this and wouldn’t advocate that anyone else does it (except possibly for a house where your net cost [lost return on down payment + mortgage payment] was the same or lower than a rental). What I’m advocating is paying banks a small amount to use their money to make a larger amount.

I’ve been really into investing and financial stuff recently, but I don’t write much about it because I don’t want this to turn into a financial blog. The reason I wrote about this is because I think it’s counterintuitive to think of having a negative cash balance as being financially prudent, and it’s a good example of why it’s important to think for yourself rather than do what everyone else is doing.

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I am in Alaska on a cruise now! It feels so amazing to be cruising again.

Photo is a ceramic centerpiece made by Zsolnay in Budapest.

If you want the lowest Interactive Brokers interest rate, go to stockbrokers.com and use their link. It starts you at just around 1%.

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15 comments

  1. It’s very hard to predict the stock market. However, I’ve been researching this lately and the only 2 indicators I could find that were mildly reliable was the Warren Buffet indicator and the CAPE ratio (0.4 predictive reliability according to a Vanguard study):

    https://currentmarketvaluation.com/models/buffett-indicator.php

    https://indices.barclays/IM/21/en/indices/static/historic-cape.app

    Both of these are suggesting the US market is in a large bubble right now similar to that of the dot-com bubble. Even if not heavily invested in the US market, if the US crashes then it’ll take down a number of other markets with it. So I’d be very careful overleveraging yourself right now and buying at the top of a long bull market. Playing defensively seems more sensible right now.

  2. Hey Tynan, love your blog posts usually but this seems really irresponsible!
    1. There’s no such thing as “no risk”. What happens if your real estate friend ends up losing all the money because the market suddenly turns bad? (not saying your friend doesn’t know what he’s doing, but all investments have risks)
    2. There’s a difference between a banking and a brokerage account. For example, in UK, money deposited in a bank is generally protected by the FSCS, which means you get (a lot of) your money back if the bank goes under. Brokerage accounts don’t always have the same protections.
    3. If Interactive Brokers go under, you no longer have a margin account. You only have to look as far back as 2007/2008 for examples of this kind of thing happening! Even if you can get your money back, it’ll be months later… It’s important to always keep some emergency cash around.

    1. 1. Sure, I agree that nothing is actually no risk, but this is close enough that I can call it that comfortably. I have zero doubt that he would make things right no matter what, based on past experience and knowing him well.

      2. I have negative money there, so I’m not worried about it. Even if I had positive money, there is SIPC coverage of both securities and cash.

      3. I would never get into a situation with a single point of failure. IBKR could die and I’d be fine. I don’t mind the extra step of having to liquidate something in the extremely unlikely event that IBKR disappears.

      1. I see. I understand what you’re saying but I think we might be talking about different categories of risk here. Have you read any of NN Taleb’s books? He explains these things better than I could.

        I think you might enjoy Fooled by Randomness or The Black Swan (the latter is most relevant here). I’d recommend only reading the first 2/3 as he tends to waffle on at the end!

        1. I haven’t. I know I should because there are good ideas in there but I just can’t stand his writing style. I can’t even articulate why.

  3. Honest question — why would the real estate developer pay you 8% for your cash instead of borrowing from a traditional lender at a much cheaper rate?

    1. He does it because he can then make a cash offer and beat out financed offers. Once he gets the property earning a return he can easily refinance it and use the cash to pay us back.

  4. Here are some parts of the equation that are missing to me: How do you determine the appropriate “safe” Loan-to-Value ratio? What is the plan if or when there is a substantial enough crash that you get margin called? How do you know when to put outside income towards purchasing new investments vs paying down that margin balance?

  5. Hi Tynan,
    Interesting post/ thoughts.
    I’ve done something similar where we bought a parcel of land and leveraged $ from the brokerage account (Wealthfront). I am also using BlockFi which pays 8.6% interest on GUSD.

    Wealthfront charges 3.7% on margin loans, which is higher than the 1.6% you mentioned in your post. Do you know if I can transfer my margin loan?

  6. Ha, was just about to post Anchor Protocol but someone has beaten me to it… only concern is getting enough insurance cover for your deposit

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