The A, B, CDs of Cash Management

My savings account currently has an interest rate of 0.01%. Not 1.00%. One one-hundredth of one percent. Put in another context, it’s $1 of interest for every $10,000 invested over 1 year. It certainly surprised me when I saw that, as I’ve been a customer of my bank for many years. What’s probably more embarrassing is that as a financial planner, I know how bad that is, compared to what I could earn on my cash elsewhere, with competitive money market fund rates currently over 5%. I simply never bothered to check my account. Three clicks on my phone is all that separated me from knowing just how little my savings is earning in yield. It’s a sobering thought, but without having the inspiration to check it while writing this post, I may have never known quite what I was missing out on.

Thank goodness I’m not a cobbler, or my shoes would be in tatters!

So how did I miss this? Well, for a very long time interest rates were extremely low. Starting with the Great Recession of 2008, there have been a string of events that resulted in massive government intervention to stimulate the economy, which has kept interest rates very low for most of the period since 2008. However, as a result of many years of stimulus and supply chain issues related to the COVID pandemic, inflation began to rear its ugly head in 2021 – and beginning in 2022, rates shot up as the Federal Reserve rapidly raised interest rates to combat that inflation. Before this increase in rates, competitive money market funds were earning about 0%, just like my bank… But since then, things have changed dramatically, and many people (including me) have been missing the fact that they could do a lot better than the rates most banks are currently offering.

The bottom line is that if you have a large balance in savings that you’re keeping for a rainy day, it’s worth seeing if you can make it more productive. Going from 0.01% to over 5.00% is a whopping 500x increase in the amount of interest income that you can be earning.

Traditionally, there are three options for managing cash and cash-like investments: bank accounts, money market accounts, or CDs. Additionally, through a brokerage account you can invest in short-term Treasury Bills or Notes, which are effectively government issued CDs without the bank deposit insurance, but with the backing of the US government. When balancing out these ideas, consider the following:

A – Access

How liquid are these funds in a pinch? Your bank account is likely accessible the same day that you need funds. Money market funds may take two or three business days to reach your checking account. CDs can have lockup periods and taking out the money early can come with a steep penalty. Treasury securities, although generally very salable through your brokerage account, can move up or down in value a bit if you need to sell them to get the cash out before they mature.

B – Backstop

What kind of guarantees do you have with these funds? Both bank accounts and bank CDs are FDIC insured. This means that the federal government currently insures amounts up to at least $250,000 per account (joint accounts and trust accounts may qualify for higher coverage). Even if your bank fails, your money is safe up to the limits of the coverage. Most money market funds, in contrast, are not protected by insurance, but rather by being diversified across many investments in individual and/or US Treasury issued securities. While they are a much more stable and safer investment than stocks or longer-term bonds, they can theoretically decrease in value.

C – Consistency

How long are these rates going to stick around? CDs and Treasury Bills and Notes have set periods over which they pay out a specified interest rate, after which they mature at their stated “par” value. This period can typically be as short as 3-months or as long as 5-years. Money market funds and bank accounts have interest rates that can fluctuate daily.

D – Decisions

When it comes to figuring out what to do with your cash, it is important to understand the tradeoffs. More yield might be wonderful, but if it comes at the cost of liquidity (i.e., access to the funds if you need them in a pinch), then you might be worse off for having to pay an early withdrawal penalty or sell for a discounted price, rather than picking a different option. Does FDIC insurance matter to you? How much interest income are you willing to forgo to “pay” for that insurance, just in case your bank goes insolvent?

There is no right answer that applies to everyone when considering how to balance these competing options, but there is a right answer for you and your specific needs. In any case, do yourself a favor, log into your bank app, go online to the bank’s website, or heck, go into the physical branch and ask, “what are my savings earning, today?” It may surprise you to know there are better options out there!

Please feel free to reach out to us at Integris if you have more questions about how to earn more on your cash and reserve balances.

The information provided herein is for educational purposes only, and should not be construed as advice, including, but not limited to tax, legal, insurance, investment, or retirement advice. For your specific planning needs, please seek the advice of Integris Wealth Management, your tax accountant, attorney, insurance agent, or other professional as appropriate. Investing involves the risk of loss.