How To Improve Your Yield on Cash
Finally, rates are worth shopping for.
The number thirteen is widely considered to be an unlucky number. It also happens to be the number of years the Fed has kept its key interest rate, the Fed Funds Rate, at a target of nearly 0%. Since the Fed Funds Rate largely determines the rate banks receive and dole out on deposits, savers ultimately paid the price for the zero-bound policy. Finding a positive real yield on a checking or savings account this past decade was like finding the proverbial snipe while at summer camp, impossible.
Times have changed, and these times are better for savers. However, banks have been painfully slow to adjust to the new rate environment. This has raised some concerns about the banking sector with industry pundits theorizing that institutions could see massive deposit flights to money market funds and other demand deposit alternatives with more reactive rate structures. I find these concerns to be overblown but do agree that banks should pay a fair rate on deposits if they want to retain customers. These are not altruistic entities, a bank will not raise deposit rates unless they are coming under competitive pressure to do so. So, consider this a public service announcement to call you, as the consumer, to action. You deserve a fair rate on your cash!
I base my personal and professional opinion on ‘what is fair’ on the current Treasury Note market, which offers yields of around 4.8% on the 3-month note as of the time of this writing. Therefore, you should be getting between 4 – 5% on your savings (not checking) if your bank is competitively pricing its short-term deposit accounts. Here are some quick ideas that could help you hunt for a better yield:
Source: https://home.treasury.gov/
Idea 1: Consider opening a www.TreasuryDirect.gov account to purchase Series I bonds. There are a few catches such as illiquidity for 12 months, and a $10,000 deposit limit per person, per year. Also, there is a three month interest penalty if you cash in your bonds before a 60 month window. On the positive side, the current rate is 6.89% and is adjusted twice per year to yield a positive fixed rate over the CPI-U index! I encourage savers to store emergency funds here in $1,000 bond purchases so that you do not need to cash in a large bond for a small need. These are backed by the full faith and credit of the US Treasury and linked directly to your checking account for online transfers.
Idea 2: Shop banks for your savings. The point of emergency savings is to use it only when you’re between a rock and a hard place. Convenient access should be secondary, although access is important. There’s enough flexibility here to maintain your emergency fund at a bank other than the one holding your checking account. There are numerous banks, especially online banks, paying more competitive rates on savings and CDs. Moving your savings account is much easier than moving your checking. The downside of this strategy is that there is a lot of effort involved in staying on top of it. Also, it requires you to abandon customer loyalty which can go a long way in fostering helpful relationships at your financial institution.
Idea 3: Use a broker to build a cash management strategy. This broker could be a discount broker such as Charles Schwab or a full-service broker. Nearly all brokerage firms offer access to insured deposit solutions such as Certificates of Deposit, or money funds. For nearly a decade, they were largely ignored by consumers because few would go through the trouble of structuring time deposits for an additional 0.25%. Now, however, the difference is meaningful and certainly worth the bit of extra effort.
For the reader looking for my opinion on the optimal cash management solution, this is the current strategy I use:
Step 1: Maintain 3 months emergency expenses in a money fund. I use a popular money market mutual fund here, but there are numerous options to choose from. I recommend consulting with your financial professional to find the right fit for you.
Step 2: Maximize Series I Bond purchases for the year. Just go to here to learn how to do this. Given enough time, you could have your entire emergency fund held in Series I bonds that are fully liquid. This option would not work for corporate cash management, unfortunately. This is for individuals only.
Step 3: Any additional cash needing a home goes into a CD ladder with 3 – month maturity rungs. Use matured CDs to refill the money fund when an emergency arises. I can purchase CDs from multiple banks through my brokerage account, which significantly streamlines the rate shopping process every maturity.
The longer you wait to do this, the more money you leave on the table. Rates are probably going to stay higher for the coming economic cycle so this should be a low time commitment/high reward activity. Remember, interest compounds on itself. Consider this your financial “Spring Cleaning” task!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. Certificates of Deposit are FDIC insured and offer a fixed rate of return if held to maturity. Brokered CDs sold prior to maturity in the secondary market may result in loss of principal due to fluctuations in the interest rate or lack of liquidity. Brokered CDs are registered with the Depository Trust Corp. (“DTC”). Brokered CDs with step-down and/or call provisions may be less favorable than traditional CDs without these features. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Securities offered through LPL Financial LLC. Member FINRA/SIPC. Advisory Services offered by National Wealth Management Group LLC, an SEC Registered Investment Advisory and separate entity from LPL Financial LLC.