Cash Is Back: Here’s How to Use It to Your Advantage

Until recently, it was hard to get too excited about cash. With historically low interest rates, typical savings accounts were delivering negligible returns, making FDIC-insured bank accounts a safe, but not awe-inspiring place to park your extra money.

For several years, the minimal yields on cash deposits have pushed many to choose riskier investments, like stocks and stock funds for their extra cash. Over the past year though, rising interest rates have pushed yields higher on cash accounts, making them a more viable, and safer alternative.

Here’s what you need to know about making your cash work for you:

How Much Cash Do You Need?

Before determining how much extra cash you have, it’s important to make sure you have enough cash on hand to cover your immediate, and potential, needs.

As a general rule, most experts recommend keeping liquid, accessible savings large enough to cover expenses for at least six months for single income households, and three months for dual income households. This would enable you to keep paying for essentials like your rent or mortgage, food, and utility bills in the event of a job loss or other loss of income.

On your own or with your advisor’s help, determine how much you would need to have to cover those three to six months, depending on your situation. If you don’t currently have enough cash on hand to meet those needs, consider prioritizing extra savings until you do.

Don’t forget about inflation. The elevated levels of inflation we’ve experienced over the past 18 months have driven prices much higher, meaning your savings can’t go as far as it once did. Your advisor can help you account for factors like inflation into your financial plan to ensure that your cash is doing the most it can to keep up with inflation.

Understand the Options for Your Cash

Cash is a general term that covers a wide range of accounts and investment vehicles that can help you do more with your extra cash. Here are some of the options available to you:

FDIC-Insured Accounts

The FDIC is the Federal Deposit Insurance Corporation, a U.S. government-supported agency that protects the value of money held in U.S. banks. FDIC insurance will cover up to $250,000 in deposits per account holder, per institution for each account ownership type.ⁱ That means if you have $250,000 in a savings account at one bank, and $250,000 in a Certificate of Deposit at another, the full $500,000 would be covered by the FDIC, but if both accounts were in the same ownership category at the same bank, only half would be covered.

Here are the most common FDIC-insured deposit accounts:

Savings Accounts

With a bank savings account you can earn modest interest on your savings. The average annual percentage yield on traditional bank savings accounts as of May 2023, was 0.25%. The advantage of a regular savings account is that your cash is protected, and even if interest rates drop, your principal deposit will always remain. Importantly, these accounts are highly liquid, and you can typically access your cash very easily.

High-Yield Savings Accounts (HYSAs)

Similar to a regular savings account, HYSAs are FDIC-insured deposit accounts that work to both protect and grow your cash. Unlike regular savings accounts, HYSAs offer much higher interest rates, meaning your money can grow while remaining safe, secure, and accessible. The trade-off is that some HYSAs, especially the ones with the higher interest rates, may have fees or limitations on withdrawals, making them more ideal for medium to long-term savings.

Certificates of Deposit (CDs)

A CD offers the same principal protection as a savings account with the opportunity to earn a higher yield by agreeing to lock up your money for a specified period, generally anywhere from six months to five years. Typically, the rates on longer-term CDs are higher.

Unlike other savings options, CDs do not offer immediate liquidity. If you need to take money out of your CD before its set expiration date, the bank may charge a penalty. If you know you will not need access to your money in the near term, a CD might be a good place to park it and earn a higher yield.

Money Market Funds

Money market funds are more like mutual funds than savings accounts. The money you put in a money market fund is invested in securities. They are unlike mutual funds, though, in that they have a fixed net asset value of $1.00 per share. Money in a money market fund is not insured by the FDIC.

General money market funds invest in short-term debt issued by the U.S. government and corporations.

Some money market funds will only own U.S. government debt. These government money market funds are considered more conservative, due to the reliability of U.S. government debt. In exchange for that additional security, the yield on a government money market fund is generally lower than the yields of funds that invest across the government and corporate sector.

Like some of the other cash accounts mentioned above, because of the recent interest rate hikes by the Federal Reserve, money market funds are currently paying much higher yields than they have for the last ten years.

Money market funds do have fees, expressed as an expense ratio, that cover the costs incurred by the managers of the account.

Cash Alternatives

Investors who want to earn a little more income can consider investments that have historically been very safe, even though they do not offer the benefits of FDIC insurance or a stable price.

I Bonds

I bonds, which can be purchased directly from the U.S. Treasury’s website, are not as liquid as bank savings vehicles, but do offer higher yields than other cash vehicles. If you cash out your bond between one and five years of owning it, you also may have to pay a penalty that would reduce the interest you could have otherwise earned. After five years, there is no penalty for cashing out. You can own these bonds as an income-generating investment for up to 30 years. You can also feel reasonably confident about getting all your principal back whenever you choose to because the bonds are backed by the full faith and credit of the U.S. government.

Short-Term Bond Funds and Bond ETFs

If you want to pursue higher yields than those available from money market funds, you might consider what are known as short-duration bond mutual funds or exchange-traded funds (ETFs). These funds do not have a fixed NAV. Their prices will fluctuate. Still, their prices are relatively stable because these funds generally invest in investment-grade debt instruments with short-term maturities of five years or less.

A bond mutual fund is actively managed by a team of investors and generally has higher fees to compensate the managers for their investment skill. A bond ETF is not actively managed and typically replicates the holdings in an index of short-term bonds, making its fees lower. An ETF price will also fluctuate throughout the day and allows for intraday trading. With both of these investments, you may be able to access higher returns than a traditional savings account, albeit with higher fees, and the potential to lose some of your money.

Diversify Your Cash Positions

Your cash positions can support a wide range of needs, everything from having a ballast for your portfolio to having a highly liquid emergency fund or a supplemental source of retirement income. As always, you can turn to Trinity Wealth Management for help assessing your options and putting cash to work in ways that support all your goals.

The commentary on this website reflects the personal opinions, viewpoints, and analyses of the Trinity Wealth Management, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Trinity Wealth Management, LLC or performance returns of any Trinity Wealth Management, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Trinity Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

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Sources:

1. “Deposit Insurance at a Glance” Federal Deposit Insurance Corporation, September 13, 2022