After using Schwab for both my banking and investments for more than a year now, I'm convinced that the most under-appreciated killer feature for a brokerage is actually cash management (i.e. a checking account you can pay bills from).
Managing both my banking and investments at Schwab allows me to keep $0 in my checking account, and make use of their overdraft transfer feature to debit my investment account whenever I make a purchase or bill payment from it. If there's insufficient cash in my investment account at the time of the debit, I have the option to cover the remaining amount with margin borrowing, which usually ends up costing cents in interest since I generally sell a few shares to cover for it in the same day (trades take 2 days to settle though, so some interest will still accrue). I feel that's a tiny price to pay for the ability to keep myself fully invested as much of the time as possible, and practically speaking, I rarely ever have to resort to margin borrowing anyways since I time my bills to match my direct deposits (which go directly into my investment account).
Essentially this means I only have 1 account to worry about to manage all my finances, and don't have to juggle money around between a checking account for spending and investment account for growth. This might not sound like it'd make much of a difference, but I honestly can't imagine ever going back to managing my finances the old fashioned way with multiple accounts. Needless to say, I can't see myself switching to a new brokerage that doesn't also offer cash management features of the same caliber (and AFAIK, Robinhood doesn't, but I'd love to be corrected).
Reducing the free loan you provide to a bank with a checking account is good, but be very careful with leverage. IMO any leverage should be a very deliberate decision.
If you buy a 30k car/tuition one day (depending on how much you have invested, this could be a lot of leverage!), and the market crashes by 50% the next day, would you be ruined? It's possible that even if the stock immediately recovers from some flash crash, you'll have insufficient collateral and the positions will be closed. (Locking in huge losses at the worst time during some irrational panic)
EDIT:
I suppose this is no more risky than buying something on a credit card, then selling a stock to pay off the card after a month. Still, Schwab can't get your credit card balance and close a position in real time, whereas they can with this leverage strategy.
You definitely raise a valid point, but as I mentioned in reply to a sibling comment, I do try to prepare in advance for big purchases like those by selling off stocks to pay those off in cash. I would never deliberately use margin as a financing option due to those dangers you mentioned.
Your scenario meets the definition of 'using margin as a financing option'. It is the same as the overdraft option provided by credit cards, only it is more dangerous since in the margin call scenario they actually liquidate your stocks without asking you (if I recall from reading up on how this works at most discount brokerages a few years ago). The fact that you rarely do it helps some but as we know the thing about rare events is they happen every day :). I have held myself to a "current ratio" of over two, which is considered 'healthy' by most finance people when evaluating businesses. I would encourage everyone to calculate their current ratio and make sure it is ALWAYS over two as well. It's literally the current assets (cash you could get access to in a year) divided by the current liabilities (all expenses due in a year). Easy to calculate and immensely freeing once you decide it's a rule you'll never break.
Small point but I think you might mean Liabilities divided by Assets = 2. (aka the 6 month rule)
> It's literally the current assets (cash you could get access to in a year) divided by the current liabilities (all expenses due in a year)
Essentially you should have a 6 month runway. If you have 25K cash and 50K costs per year then the $25K will buy you 6 months to get yourself over a layoff/health issue/etc.
Just a small point because it's a rule I live by and you freaked me out for a moment thinking the advice/goalposts had move way beyond what I've saved for.
No, the numerator is current assets and the denominator is liabilities. This way if you have half of what you are about to spend in a year, your ratio is .5. If you have double what you are about to spend in a year, your ratio is 2. In your example, your current ratio is .5. Still you are doing way better than most people I know and the stats on national savings and lifestyle requirements bear this out as well.
While we had the same amount of debt in both cases, in scenario A, there's no instant way for the car loan provider to instantly declare that you don't have liquidity at midnight.
> I suppose this is no more risky than buying something on a credit card, then selling a stock to pay off the card after a month.
It's definitely more risky than that. With the credit card strategy your maximum loss is whatever the interest rate on the credit card is. The stock market could drop by a much larger amount.
I think the ideal cash management setup is to get a rewards checking account without a debit card usage requirement (harder than it sounds to find), direct deposit your paychecks into that, have a 1-2 month cash buffer there, and invest the extra through ACH pulls out of that. If your portfolio is large, having a month of expenses earning 1.75% or whatever risk-free is likely a small improvement. If your portfolio is large, the lower return on a small portion doesn't matter. If you portfolio is not large, you should have a larger cash position to de-risk your overall life.
You might also be able to mail checks written against a brokerage account with that option enabled, but mailing checks sounds like a pain. I know that Vanguard's brokerage account allows both check writing (with a $250 minimum) and direct deposit, but that doesn't quite do enough for running your life out of one account.
>whenever I make a purchase or bill payment from it
FWIW, if you have access to credit cards, you should pretty much always use a credit card rather than a debit card.
> I think the ideal cash management setup is to get a rewards checking account without a debit card usage requirement (harder than it sounds to find), direct deposit your paychecks into that, have a 1-2 month cash buffer there, and invest the extra through ACH pulls out of that.
This is pretty much exactly what I used to do, but the user experience of managing cash from my investment account directly is dramatically better than having to juggle cash between different accounts through ACH, in my experience. Even if I didn't value staying fully invested as much as possible, I'd probably still choose to keep those extra few months of expenses as cash in my investment account just for that experience alone. Though admittedly Schwab wouldn't be the best choice for that usage pattern, because their interest rates for cash are rather pathetic.
> FWIW, if you have access to credit cards, you should pretty much always use a credit card rather than a debit card.
Agreed. The only things I pay for with debit directly are things that won't let me use a credit card, like for rent.
Had to look it up, but I paid a bit under $5 in total last year. Mostly towards the beginning of the year when I didn't have my bills set up properly (i.e. the timing didn't match my direct deposits at first, had to make some calls to change that) and from some large ticket purchases that a single paycheck couldn't fully cover (with sufficient planning those could have been avoided if I sold some stocks beforehand). I haven't needed to make use of margin at all for well over 6 months now.
Schwab's margin rates are on the high side, starting from 7% and up, but even then if you're borrowing for 2 days at a time the cost ends up being negligible (about ~$1 for every ~$3000 borrowed). At the very least, it's much better than most overdraft fees/lines of credit. Though if Interactive Brokers were to offer a bank account, I'd be very tempted to switch with their amazing margin rates.
IB has a debit card but no bank account, dunno if that's enough. You can also receive and initiate ACH transfers, but that doesn't pay credit card bills without routing through a checking account with bill pay.
What's stopping me from using IB is the $10/month commission minimum. It's waived at $100k account balance, so I plan on switching over then.
Thanks! Just looked it up. It's really cool that they're moving in that direction.
Can you do bill payments directly from an IB brokerage account? I think that might be the final missing piece for me, but I'd love to be wrong about that.
Managing both my banking and investments at Schwab allows me to keep $0 in my checking account, and make use of their overdraft transfer feature to debit my investment account whenever I make a purchase or bill payment from it. If there's insufficient cash in my investment account at the time of the debit, I have the option to cover the remaining amount with margin borrowing, which usually ends up costing cents in interest since I generally sell a few shares to cover for it in the same day (trades take 2 days to settle though, so some interest will still accrue). I feel that's a tiny price to pay for the ability to keep myself fully invested as much of the time as possible, and practically speaking, I rarely ever have to resort to margin borrowing anyways since I time my bills to match my direct deposits (which go directly into my investment account).
Essentially this means I only have 1 account to worry about to manage all my finances, and don't have to juggle money around between a checking account for spending and investment account for growth. This might not sound like it'd make much of a difference, but I honestly can't imagine ever going back to managing my finances the old fashioned way with multiple accounts. Needless to say, I can't see myself switching to a new brokerage that doesn't also offer cash management features of the same caliber (and AFAIK, Robinhood doesn't, but I'd love to be corrected).