May 8, 2023
Bottom Line Up Front:
- Deposit rates on cash now range from 3-5% as a result of the Federal Reserve’s interest rate increases over the past year.
- You have several options for cash that you don’t need for the next 6-12 months.
- For cash you are saving for the long-term that you don’t foresee needing for the next 2-3 plus years, the stock market remains a good place to invest, as it has historically outpaced inflation and short-term cash or fixed income options.
For almost a decade, it didn’t matter where you put your cash. Whether it was in a checking or savings account with a bank, a short-term Treasury bill, or a high-yielding online savings account, the return was effectively 0% for investments that matured in 0-12 months. This was intentional, given the Federal Reserve set short-term interest rates at 0% for several years to encourage borrowing and to spur on economic growth.
As you know, we are now in a new interest rate environment, where the Federal Reserve has raised interest rates in an attempt to slow down inflation. Bank deposit rates and short-term investment yields have responded. Given the questions we received from you on where to park cash for the short-term, we have compiled some options as pure examples (not endorsements or recommendations):
Institution and Current Annual Percentage Yield (APY) as of 5/1/23
Online savings accounts
- Betterment Cash Reserves - 4.35%
- Ally Bank Bucketed Savings - 3.75% (limited to 6 withdrawals per month, but excess withdrawal fee of $10 is reimbursed)
- Discover Online Savings - 3.75% (limited to 6 withdrawals per month)
- Capital One 360 CD Account - 4.15% (1 year)
- Check with your bank to see what rates and terms they offer.
Direct Treasury Bill purchase
- Requires you open a Treasury Direct online account
- Maturities for Bills range from 4 weeks to 1 year
- Rates vary, but have recently ranged from 4.0 - 4.9%. Currently shorter terms of 3-6 months are yielding higher than longer terms, which is why we recommend Bills (maturities of 4-52 weeks) over Notes (maturities of 2 years or more).
Treasury Bill or CD purchase through your brokerage account
- Pandowealth can help you determine the best option depending on your time horizon and how it fits in with your investment portfolio.
- Treasury yields are currently inverted, meaning the short-term rates are higher than the longer-term rates.
- This option requires no additional account opening.
Lastly, for those that have extra cash that you desire to invest without a specific need in the next 1-3 years, the stock market remains a good place to invest and has historically outpaced both inflation and fixed income yields. Yes, there are risks present, but uncertainty is nothing new. Consider the events of the last three years alone: a global pandemic, the Russian invasion of Ukraine, spiking inflation, and ongoing recession fears. Despite these concerns, for the three years ending February 28, 2023, the Russell 3000 Index (a broad market-capitalization-weighted index of public US companies) returned an annualized 11.79%. This is clearly much higher than short-term bond interest or money market yields, as high as they are. Source: Dimensional
We would welcome a discussion with you if you have further questions or want to discuss which approach is best for you.
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Pandowealth. LLC (“Pandowealth”) is a Georgia-based advisory firm registered with the Securities and Exchange Commission (“SEC”). Registration does not imply a certain level of skill or training. Pandowealth is not affiliated with Betterment, Ally Bank, Discover, Capital One, or Dimensional.
This newsletter is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This newsletter should not be relied upon as the sole factor in an investment making decision.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made by Pandowealth, in the future, will be profitable or equal the performance noted in this presentation.
All opinions and estimates constitute Pandowealth’s judgment as of the date the information was printed and are subject to change without notice. The information herein is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Pandowealth. LLC disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
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