There has been a lot of news coming out of the banking industry: FDIC, Silicon Valley Bank, Signature Bank, First Republic Bank, Credit Suisse, interest rate hikes, and more interest rate hikes.
It's been a lot to take in.
In the meantime, those who have been holding more than $250,000 cash in the bank rightfully should be questioning their approach.
We are proudly open to offer different cash management options to our clients.
If you find yourself debating a CD, or moving money out of the bank, please give us a call.
Written by: Hardika Singh
Image: Emil Lendof/The Wall Street Journal
March 24, 2023
This year’s market turmoil has sent nervous investors rushing to cash. But protecting your money isn’t as simple as parking it in a mattress.
Despite recent strains in the banking sector, a bank account remains the simplest place to store cash. Balances up to $250,000 are protected by the Federal Deposit Insurance Corp., or FDIC, at any U.S. bank.
But checking accounts still offer almost no return on that money, and there are higher paying alternatives. Those include high-yield savings accounts, money-market funds, certificates of deposit and short-term Treasurys. All of those are boasting interest rates around 3% to 5%.
Financial advisers note that holding cash means missing out on any gains, along with the losses, and caution against market-timing. But for those seeking to sit out the stock swings for now, here are some pros and cons to consider:
High-Yield Savings Accounts
These accounts typically pay interest rates that adjust with those set by the Federal Reserve—or around 3% to 4% right now.
Cindy Golub and Laurie Girsky, principals at financial-planning practice G-Squared Advisory, said they are a good option for investors with low risk-appetite and who want the flexibility to withdraw money at any time—though it can take a few days to transfer the money from one account to another. As an added perk, most of them tend to be insured by the FDIC.
They recommend setting aside six-to-nine months of living expenses for emergencies in a high-yield account from Marcus by Goldman Sachs, which is paying 3.75%. Another option is Capital One’s 360 Performance Savings account that earns 3.40%.
“Yields are really high right now,” Ms. Golub said.
Money-market funds invest in short-term debt securities including Treasury bills and commercial paper. People poured more than $115 billion into them during the week that ended March 22, the largest weekly net inflow since the spring of 2020, according to Refinitiv Lipper data.
One recent enthusiast is Matt Majeske, a 63-year-old physician in New York City, who’s using interest earned from his money-market funds to make up for increasing costs. “It has helped offset the significant increase in my rent,” he said.
Amy Arnott, portfolio strategist at Morningstar Inc., says money-market funds make the most sense for investors looking for higher yields on their cash. She prefers the Fidelity Government Money Market Fund, because it has low fees—0.42%, or $42 on a $10,000 investment—and offers a yield of 4.22%. Another popular example is Schwab Government Money Fund, which charges 0.44%, or $44 on a $10,000 deposit and earns about 4.14% in yield.
Ms. Arnott adds that money-market funds are better suited for investors who are comfortable taking on more risk since they aren’t usually FDIC-insured and have suffered periods of stress, including during the Covid market crash and the 2008 financial crisis, that required regulators to step in.
Certificates of Deposit
Known as CDs, these are among the safest investments. They offer higher interest rates than a regular savings or checking account in exchange for locking up your money for a set amount of time, typically somewhere between three months and two years. Because investors can’t withdraw their money before the period ends without paying a penalty, they work best for those who don’t need their cash for months or years, G-Squared’s Ms. Girsky said.
Another drawback is that the CD’s interest rate is determined ahead of time, so if the Fed raises rates, investors could miss out, Ms. Girsky said.
“Rates could go either way, but if rates go up, you lock yourself at a certain rate,” Ms. Girsky said. Her firm recommends Capital One’s 12-month 360 CD, which pays 4.15%. Another option is Synchrony’s 14-month CD, which is at 5%.
U.S. Government Bonds
In addition to owning Treasury bills through money-market funds, you can also buy them directly from the government on the TreasuryDirect website, which helps avoid fees and allows investors greater control over what bonds they buy.
Allan Roth, founder of investment advisory firm Wealth Logic LLC in Colorado Springs, Colo., recommends Treasury bills, which get hurt less than longer-term bonds when rates rise. The yield on a six-month Treasury bill is around 4.729% and a one-year Treasury bill is at 4.341%.
But to avoid the work of purchasing individual bonds, Mr. Roth still suggests clients get exposure through funds, including the Vanguard Treasury Money Market Fund, which charges 0.09% in fees and provides 4.59% in yield, or the Fidelity Treasury Money Market fund, which charges 0.42% and pays 4.23%.
“There’s no real penalty to holding cash these days.” Mr. Roth said. “We can have our cake and eat it too.”
Write to Hardika Singh at firstname.lastname@example.org
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