Chris is out of the office this week, so a more apt title might be “Mark’s Musings.” In any event, Chris and I spoke about planning topics, and agreed that cash management was the most important issue right now.
For the past several years, it has been impossible to get any sort of return on cash balances. The Fed Funds rate was literally zero for a while, and banks, money market funds, and CDs all paid close to zero percent interest on cash balances. You could leave money in your bank account because there wasn’t much opportunity cost.
However, that has changed over the past year as the Fed has aggressively raised short-term interest rates. Unfortunately, banks have not kept up, and interest paid for checking and savings accounts is still quite low, even if they are up from zero. Holding large cash balances in such accounts is therefore no longer the best course of action.
There are high-yield, on-line savings accounts with interest rates as high as 4.75% currently, but with recent bank failures, you should be careful about which bank you choose if you pursue this approach. FDIC insurance protects smaller deposits, but for those keeping large amounts of cash, we would be very selective about the institution we select.
We have seen 18-month to two-year CDs with rates over 5% recently. CDs constrain your liquidity somewhat, but if you are planning to sit on cash longer-term, this is not a bad option for trying to keep pace with inflation.
You can compare rates for high-yield savings accounts and CDs at www.bankrate.com or www. nerdwallet.com.
We have been buying Treasury bills for some clients. Rates were significantly over 5% for 6-month T-bills but have now fallen to just under 5%. This is still not bad, and T-bills generally offer more liquidity than CDs.
For full, daily liquidity money market funds and Flourish Cash may offer the best approach. As an example, the Vanguard Federal Money Market Fund currently has a yield of 4.75%. Flourish offers a 4.4% yield with full FDIC protection on fairly large balances ($1.25MM individual / $2.5MM joint).
The world has changed over the past year, making things more complicated for savers. However, the good news is that you can finally earn a reasonable return on your cash. There are a number of options, each with its own nuances, so feel free to call us if you would like to discuss what might be right for you.
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