Inflation, interest rates, stocks, bonds…there are countless factors to consider when thinking about your investment portfolio and your long-term goals, but when was the last time you considered what to do with your short-term cash savings? We all have a dollar amount that makes us feel comfortable in savings to be able to handle unexpected expenses or to cover 3 to 6 months of living expenses, but are you holding them in the right place?
“Cash is trash” has been the mindset of most investors over the past decade and with good reason. With interest rates at near zero levels since the Great Recession, there was no reason to save cash inside of a savings account if your hope was to earn a little bit of interest. However, with the dramatic increase of the federal funds rate from 0.25% at the beginning of 2022 to 5.00% about one year later, there are now alternative methods that can be considered.
Certificates of Deposit (CD)
CDs are an investment vehicle that will “lock up” your cash for a specified period. In the past decade, CDs may have earned you a percentage or two each year, but as of March 2023, you could find a 3-month, 6-month, or 12-month CD paying an annualized rate between 4% and 5%. This could be a great alternative for cash you want to hold and not risk putting in the market but want to earn some interest while you determine the future purpose of these funds.
As an added note, for any of you who have “rolling” CDs where you are automatically invested into a new CD at the date of expiration I would highly recommend double checking the rates you are getting. This is because I have seen CDs that began many years ago being rolled into newer CDs at the original low interest rates even though rates have risen substantially.
High-Yield Online Savings Accounts
Another alternative would be an online high-yield savings account. These accounts act similarly to any other savings account, but a downside of this option is that there is no physical location you can go to. The benefit of this type of account is that they can provide a much more attractive interest rate. Depending on which bank you choose, the current annualized interest rate could be between 3% and 5%. Of course, with all the chaos happening in the banking world at this time, we would highly encourage you to only open an account with a bank that is FDIC insured.
Have You Checked Your HELOC Rates?
This may seem a little strange to be talking about Home Equity Lines of Credit (HELOC) inside of an article talking about cash savings, but have you checked the rates for your HELOC lately? It is likely your interest rates have doubled since the beginning of 2022. What this means is that it may have been our advice to continue with minimum payments while taking advantage of the low interest rates in the past, but it may be more beneficial now to use your savings to pay off your HELOC due to the increase in interest rates.
Interest Rates Are Constantly Changing
Interest rates can fluctuate based on many different factors and it is now very clear that significant change can occur in a short amount of time. It could be possible that this time next year the suggestions made in this article may be obsolete and we want you to be able to take advantage of the current interest rate environment. With that being said, we always want you to be informed and we encourage you to reach out to your advisor if you have any questions or are interested in applying some of these suggestions to your current financial plan.
Written by Jacob Kipi, CPA, Wealth Advisory Associate