Contributed by: Kali Hassinger, CFP®, CSRIC™
As Financial Planners, we often talk to clients about the importance of maintaining a cash reserve for emergencies or unforeseen expenses. In past years, the return on cash has been minimal, if not close to nothing, but throughout 2022, we have seen interest rates continually rise. This presents the opportunity to get some interest on cash! There are several options available, so which is most appropriate for you? Where to put cash savings, as with other investments, depends on your time horizon and goals.
Money Market Accounts
Money Market accounts are offered through a bank or credit union, often offering greater interest than a typical savings account. The rates paid by a money market are based on current interest rates, and the rate you receive can adjust periodically. These rates are often more attractive than savings, but transaction limits and high minimum account balance requirements can exist. Rates can also be tiered, meaning the higher your balance, the higher the interest paid. These accounts are easily accessible, sometimes offering check-writing abilities, and insured through the FDIC up to $250,000.
CDs
Short Term Certificates of Deposit, or CDs, purchased through a bank or credit union, are also FDIC insured but allow less liquidity than Money Market accounts. CDs earn a fixed rate over a pre-determined amount of time, ranging from a few months to several years. Accessing money before the maturity timeline can result in penalties, so be sure you will not need to access the funds before the required period.
Money Market Mutual Funds
Money Market Funds hold a basket of securities that can generate gains and losses that will be passed onto shareholders. The investments held, however, are usually considered short-term and low-risk, such as U.S. Treasury bonds and high-quality corporate bonds. Unlike the Money Market accounts discussed above, the FDIC does not insure these funds.
They are similar to Money Market accounts, however, in that interest rates fluctuate. Although there is an inherent risk with these funds, shareholders should not experience excessive price fluctuation, which can be held for short periods. Investors must trade into and out of these funds, so there can be a lag of a few days in order to access the account balance.
Treasury Securities and Bonds
Treasury-backed securities have started to pay attractive rates as the Fed has continually raised interest rates throughout the year. These are backed by the U.S. government, which is another way of saying that they are generally considered some of the safest investments available. Treasury Bills are short-term securities with several term options ranging from four weeks to a year. Like CDs, you should only invest funds that you are confident you will not need to access before the maturity date, but these can be resold on the market if necessary.
I-Bonds, sold through Treasury Direct, have become attractive for the first time in many years. These bonds must be purchased through TreasuryDirect.gov, and the amount an individual can purchase is limited to $10,000 per year (with additional allowances if you purchase paper I-Bonds). These must be held for a year, but if you cash them in earlier than five years, you lose three months of interest.
If you are still determining which option is best for you or if you are interested in investing cash, be sure to reach out to your planner!
Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.
The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger, CFP®, CSRIC™ and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Individual investor's results will vary. Past performance does not guarantee future results. Investments mentioned may not be suitable for all investors.