Where are you putting all that cash?
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For the past decade, it has been incredibly difficult for savers to earn much on their cash savings. However, this is changing as the Federal Reserve raises interest rates to battle inflation. As a result, yields on various cash vehicles are now becoming more interesting.
Checking Accounts
Checking accounts are likely the most common accounts holding cash. Over the past decade, many checking accounts moved their earned interest rate to near 0%. A common yield offered was 0.01%. With the Fed raising interest rates by 2.5% this year (so far), a yield of 0.01% seems outdated. It is worth reviewing what interest you are receiving as many banks have not increased interest rates.
If the Fed continues to raise interest rates, the gap between what you are receiving and what you could be receiving may become quite large. At a minimum, you can keep a smaller checking balance and a larger balance in one of the following.
High-Yield Savings Accounts
High-yield savings accounts (popular with online banks) typically offer higher interest rates than those at a traditional bank while still providing the normal FDIC insurance coverage. In addition, unlike checking accounts, these accounts generally do not have requirements that must be met to qualify. In today’s environment, where interest rates at your typical bank are still near zero, it is possible to find high-yield savings accounts yielding over 2%.
High-yield savings accounts can be a good option for those that don’t want to go through the hassle of switching their checking account with all the auto payment connections. Opening an online high-yield savings account can be a simple and effective way to earn interest on your excess cash holdings. Most are set up so you can move money electronically back and forth between your checking and savings accounts.
One thing to check is whether the savings account limits the number of transfers per month. If you anticipate frequent transfers, make sure the account doesn’t have a low monthly cap.
Brokerage Money Market Accounts
Individuals with a brokerage investment account at a large custodian like Charles Schwab, Fidelity, Vanguard, etc., can invest their cash in money market funds. Unlike bank accounts, these funds are generally not FDIC insured. However, the big custodians have a long track record of running these funds over various market cycles. Many of these money market funds are yielding above 2%.
Since the yields being offered aren’t significantly different from a high-yield savings account, the benefit is mainly for those who already have a brokerage account and do not want to open another one. Or, if you have cash you are waiting to invest, you can use the brokerage money market to earn interest while you wait. These yields generally increase as interest rates go up.
Ultra-Short Duration Bond Funds
The final option is to use an ultra-short duration bond fund to earn additional yield. Unlike other options discussed above, bond funds do not offer FDIC insurance and their value can fluctuate. While these funds may work for those seeking higher yields who can stomach short-term volatility, it is important to talk to your investment advisor before purchasing one because these funds vary greatly in the amount of risk they take and the yield you can earn.
Summary
With the Federal Reserve’s rapid interest rate increases this year, there are many more options for your cash to earn interest. However, your bank may not be keeping up. Contact your bank and financial advisor directly to learn more about these possible solutions.
Ryan Collier, CIMA, is the Director of Investment Management at Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.BedelFinancial.com or email Ryan at rcollier@bedelfinancial.com.