What Should I Do With My Cash?
Unless you’ve been living in a cave, you’ve observed two things that affect nearly every consumer and investor: inflation and rising interest rates. We’ve all seen prices rise at the gas pump and at the grocery store. Also, last month, the Federal Reserve raised interest rates for the ninth time in 12 months. Gone are the days of earning 0% on your cash. If you still are, then you’re leaving money on the table.
Advisors often hear, “Now that interest rates have gone up, what should I do with my cash?” Note that “cash” in this context is money earmarked for a short-term financial goal, sidelined for an emergency, or used for everyday expenses. With everything in life there is a risk, but a few options enable you to earn without risking any loss of principal. Here is my list, from least to most risky:
Treasury Bills
What are they? A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less. T-Bills are usually sold via a weekly auction and in denominations of $100.
Why should you consider T-Bills? Since they are backed by the Treasury Department, T-Bills can be considered the gold standard for guaranteeing both the interest rate and the return of principal.
What are the risks? Of the list provided here, T-Bills often have the lowest interest rate. They are also subject to inflation risk (the real value of an investment being reduced by expected inflation) and interest-rate risk (the possibility for interest rates rising while owning the underlying investment and having to redeem at a loss prior to maturity).
Series I Bonds
What are they? A Series I bond is an interest-bearing U.S. government savings bond that earns a combined fixed interest rate and variable inflation rate (adjusted semiannually in May and November).
Why should you consider Series I Bonds? Series I bonds are designed to give an investor a return on their investment plus protection from inflation.
What are the risks? Series I bonds cannot be bought or sold in secondary markets. Like T-Bills, they have lower interest rates than others on this list. Additionally, they must be held for at least one year, and if they are redeemed in less than five years, the holder forfeits the previous three months of interest.
Certificates of Deposit (CDs)
What are they? A CD is a product offered by a bank or credit union that gives the consumer an interest rate premium in exchange for leaving a lump-sum deposit untouched for a predetermined timeframe.
Why should you consider CDs? Often, CDs offer a higher interest rate than Treasuries, and you can potentially obtain a higher interest rate by shopping around. Nearly every bank and credit union offers CDs.
What are the risks? Unlike Treasuries that guarantee your full principal, CDs are federally insured by the full faith and credit of the U.S. government via the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor at each bank per ownership category. It is important to be aware of this and not to overextend this insurance in event of a rare bank failure. Furthermore, while the FDIC does guarantee the safety of your money up to the insured limit, it does not guarantee the interest accrued for the entire term of the CD — just through the date of a bank default. Another downside of CDs is that if you need to take the money prior to the maturity date, you may pay a penalty of some or all of the interest accrued.
Bank Savings Account
What are they? A savings account is a bank account that earns interest and allows the account owner to withdraw money as needed. Banks often establish a limit on the number of withdrawals allowed each month.
Why should you consider a bank savings account? Savings accounts are popular with people who see themselves needing the money in the near future. Savings accounts are also beneficial for emergency funds, allowing fast access to cash if you have an unexpected expense. Over the last several years, we’ve seen an emergence of competition for banks offering online high-yield savings accounts, which can pay much higher interest than other types of accounts.
What are the risks? The biggest drawback to savings accounts is while we have seen rates recently increase, the interest rate is variable, meaning the bank can change the rate at any time without notice. As with CDs, one must not overextend their FDIC insurance with the $250,000 per depositor limits also apply.
What’s Your Plan?
So, what should you be doing with your cash? Consider the answer as part of your overall financial plan. Most of us have a need to hold cash allocations for various short-term expenses or emergencies, which we typically keep separate from long-term investments. At Savant Wealth Management, we help provide solutions to assist our clients in maintaining the safety and security of their liquid funds. In addition to the options mentioned here, we offer solutions for those with high balance deposits.
Savant Wealth Management (“Savant”) is an SEC registered investment adviser headquartered in Rockford, Illinois. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at www.savantwealth.com. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement.
Jonathon D. Merickel
Portfolio Advisor