Inflation is stubbornly high and interest rates on savings accounts aren’t anywhere close to keeping pace. While the yield on a two-year Treasury is now 3.28%, up from just 0.17% a year ago, the average savings account is barely in positive territory at just 0.07%, according to personal-finance website Bankrate.
For investors hanging onto cash, whether for emergency savings or other uses, it’s a frustrating situation. The annual inflation rate, as measured by the consumer price index, is up to 8.6%, which means the purchasing power of your cash is rapidly eroding.
But that doesn’t mean investors have to accept zilch when it comes to earning interest on their savings. With a little work, you can get a bit more from your cash.
“We’re in an environment where every little bit helps in maintaining that purchasing power,” says Chip Munn, an advisor and chief executive officer of Signature Wealth Strategies in Florence, S.C.
To get off on the right foot, advisors suggest that investors step back and assess what the cash is for and what their risk tolerance is. Make sure the time horizon for when you may need the money matches the chosen investment or savings product. A mismatch might leave you stranded right when you need the cash the most.
“The first question should be what is the money for,” Munn says. “The why will determine the how.”
Below are the tactical moves advisors say investors can make now to put their cash to work for three uses: emergency savings, funds for opportunistic investing, and medium-term savings goals. The strategies can also be used in other circumstances, depending on your risk tolerance, time horizon, and need.
Stashing Emergency Savings
Looking for somewhere to safely park your rainy-day fund? Because the money is for emergencies, any investment strategy needs to be low risk and very liquid, so you can tap it in a day or two if needed, advisors say. After all, emergencies happen at unexpected times.
Financial planners generally recommend setting aside funds to cover six to 12 months worth of living expenses. Savings accounts, money market accounts, and certificates of deposit are natural havens, given that they are FDIC-insured, but many banks haven’t raised rates on these accounts or are doing it slowly.
“Where you keep your cash is very important in the next couple of years,” says Greg McBride, chief financial analyst at Bankrate. “Interest rates are rising, but not every bank is increasing its savings rate and certainly not at the same pace. So you want to put your money where you can get a better yield.”
Online banks generally offer better rates than their bricks-and-mortar peers, McBride says.
’ consumer-banking unit, Marcus, has a high-yield online savings account that comes with a 0.85% annual percentage yield. Ally Bank, owned by Ally Financial, offers an online savings account with a 0.9% APY.
Short-term CDs, which are FDIC- insured, can also be a good option for a portion of the funds, as long as you have some cash available with daily liquidity in another account. Marcus and Ally Bank both offer a six-month CD with a 0.75% APY as of June 13.
McBride says some community banks and credit unions might also offer good options. “You have to seek out the banks that actively want your deposits and are willing to pay for it,” he says.
Advisors caution that while there are higher-yielding options for cash, it may be better to err on the side of prudence when it comes to emergency savings. “You don’t want your emergency fund to be exciting,” Munn says. “Horror movies are exciting. That’s not what we are doing here.”
Keeping Some Dry Powder
Investors who are holding cash in order to seize investing opportunities might be willing to take on more risk than they would with their emergency savings. But liquidity is still a concern. If shares of
(ticker: AAPL) fall to the price that you’ve been waiting for, then you don’t want your cash locked up in a CD.
Some of the savings products and strategies above may do the job, but they have the disadvantage of forcing you to transfer funds from your bank account to your brokerage account. The most common solution to that is a money market fund held at your brokerage. Charles Schwab offers several such funds, such as Schwab Value Advantage Money (SWVXX), which has no minimum investment and a 7-day yield of 0.64%, with expense waivers, as of June 14.
Investors could buy short-term Treasury bills in a laddered setup within their brokerage account, or directly from the U.S. Treasury’s website. Say you have $10,000. You can buy five four-week bills, now yielding 1.18%, in equal installments of $2,000; one of the bills matures each week, giving you an opportunity to buy another Treasury bill or invest the money elsewhere. (Treasury bills are typically purchased at a discount from their par amount. Your interest is the difference between the face value and the purchase price.)
Andy Kapyrin, co-CIO of Morristown, N.J.–based RegentAtlantic, which is ranked among Barron’s Top 100 RIA Firms for 2021, suggests investors consider an exchange-traded fund focused on short term Treasury bills. One example:
Goldman Sachs Access Treasury 0-1 Year
(GBIL). The ETF invests in Treasury bills with maturities of one year or less and has a current 30-day SEC yield of 0.87% and a net expense ratio of 0.12%. “You get the prevailing yield on T-bills, which is approaching 1% today,” Kapyrin says.
A fund such as this has the advantage of keeping your money available in your brokerage account in case a buying opportunity arises. “You can sell this and buy whatever is on your shopping list,” Kapyrin says.
Plus, there’s also what Kapyrin calls “mental health savings.” The fund manager “is responsible for taking the proceeds and keeping that cash working for you,” he says. “You can manage it yourself, but if you miss one day’s worth of interest, you give up all the benefits.”
Mike Vogelzang, chief investment officer at Raleigh, N.C.–based Captrust, a registered investment advisory, cautions investors not to reach for yield if it means locking up their funds when they might need it most. Whether you make half a percent or three-quarters won’t make much difference if you’re sacrificing liquidity, he says.
“The biggest mistake people make is mismatching their investments with their time frame,” says Vogelzang, whose firm is ranked among Barron’s Top 100 RIA Firms for 2021.
Saving for a Down Payment
Strategies for short- and medium-term savings goals, such as a down payment for a house you plan to buy in two years, can potentially be more illiquid. But, again, keep your risk tolerance in mind. Losing 20% of your down payment could significantly set back your goal of becoming a homeowner.
RegentAtlantic’s Kapyrin says investors could consider buying high-quality corporate debt, but suggests opting for an ETF rather than purchasing individual bonds, since a fund would provide better diversification. “Unless you are parking $1 million or more, if you are buying individual bonds you aren’t getting a lot of diversification,” Kapyrin says.
One diversified ETF is
Vanguard Short-Term Corporate Bond,
(VCSH), which has an expense ratio of 0.04% and a 30-day SEC yield of 3.64% as of June 13. The fund invests primarily in investment-grade corporate bonds and maintains a dollar-weighted average maturity of one to five years. The bonds are investment grade, but still subject to some credit risk if the economy turns south.
CDs offered by online banks and credit unions may offer competitive rates for savers with a longer time horizon. Generally, the longer the duration of the CD, the higher the rate. Goldman Sachs’ Marcus offers a one-year CD with a 1.6% APY as of June 15.
Douglas Boneparth, an advisor and owner of Bone Fide Wealth in New York, recommends his clients put a portion of their cash savings in I bonds, which are currently yielding 9.62%. I bonds can be bought directly from the Treasury Direct website. While their high yields can help offset the negative effects of inflation, I bonds have a few drawbacks. “Unfortunately, it forces you to lock up your money for a year,” Boneparth says.
In addition, investors are limited to purchasing $10,000 worth of I bonds a year. And if you cash in your I bonds within five years of purchasing them, you lose the previous three months of interest.
“Even then, frankly, it still may be better even with the penalty than compared to other things,” Munn says.
But no matter what purpose you have in mind for your cash savings, advisors also underscore the importance of not reaching for yield with money meant to be saved. “You get the yield you can, but it’s not about the yield. It’s about sleeping well at night,” Boneparth says. “You know you’ll be able to navigate emergencies. You shouldn’t be getting too cute or too sexy with your cash reserve.”
|Ally Bank, online savings account||0.90%||Online savings accounts offer better yields, are liquid and FDIC-insured.|
|Vanguard Short-Term Corporate Bond ETF / VCSH||3.64*||Short-term corporate bonds offer yield bump over Treasuries, but with some credit risk.|
|Series I Savings Bonds||9.62||Yield fluctuates based on inflation and is especially high now.|
|4-week Treasury Bill||1.18||Ideal for safe, short-term bond ladder.|
|Marcus by Goldman Sachs, 1-year certificate of deposit||1.60||Generally, longer term CDs offer higher rates than short-term ones. But it locks up your funds.|
*30 day SEC yield as of 6/13
Sources: Ally Bank; Vanguard; Treasury Department; Goldman Sachs
Write to Andrew Welsch at [email protected]