Cash Savings: Options to Meet Your Goals
By: Lance C. Steiner, CFP® - ASSISTANT DIRECTOR OF FINANCIAL PLANNING & SENIOR FINANCIAL PLANNER
One of the most common questions we hear from clients is, “Where can I invest some cash that is going to be lower risk and provide a better return than my saving account?”. It doesn’t matter if the stock market is at an all-time high or in correction territory, people naturally want to store cash in a safe position receiving a modest return. Over the past several years, interest rates have been at historical lows with inflation around the Federal Reserve’s target of 2% or lower. This has made it challenging to get much of a return without tying funds up for a long time. However, over the last 12 months, this landscape has changed with inflation at a 40-year high and the Federal Reserve expected to continue raising interest rates over the remainder of the year. For some, this may feel familiar to the 70’s and early 80’s, and for others, this may be a new territory. Regardless, we are all looking for opportunities to put some cash to work.
Series I Savings Bonds (I Bonds)
I Bonds, which are sold by the United States Treasury, have recently gains a lot of traction offering a current interest rate of 9.62%. The interest rate is a combination of a fixed rate, which will never change, and an inflation rate, which is based on the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U). The inflation rate is variable and will adjust every 6 months based on changes to CPI-U with the current rate of 9.62% set until November. Interest is compounded semiannually over 30 years and paid to investors when they cash in the bond. Investors are required to hold the bonds for 12 months before they can be redeemed. If the bonds are sold withing the first 5 years of purchase, the last 3 months of interest will be forfeited. Unfortunately, purchases are limited to $10,000 per person per calendar year and can only be purchased directly through the United States Treasury at www.treasurydirect.gov. There is one exception to this limit, which allows individuals to purchase up to an additional $5,000 using their tax refund. Interest income is subject to federal income tax and taxed at ordinary tax rates, but investor will receive a tax break at the state and local level since the income is not subject to tax at this level.
Certificates of Deposit (CDs)
Another lower-risk option is to consider a Certificate of Deposit (CD). Banks, credit unions and many other financial institutions offer CDs with maturities ranging from 6 months to 60 months. Currently, a 6-month CD may pay around 0.75% where a 24-month CD may pay around 2.25%; however, as I previously mentioned, the Federal Reserve will likely continue raising rates throughout the remainder of the year, so it is likely the rates on CDs will continue to increase. For anyone considering CDs, we suggest a short-term ladder, which is a strategy where an investor purchases several CDs with different maturities. For example, purchasing a 6-month, 12-month and 18-month CD. As the CDs mature, investors receive their principal and have the option to immediately purchase a new CD. This strategy will help provide liquidity at short-term intervals and allow investors to reinvest at higher rates, assuming rates continue to rise.
High-Yield Savings Accounts
High-Yield Savings accounts are another low risk option offering a modest return while retaining liquidity. Currently, the annual rate on a high-yield savings account is around 0.60%. This type of account may be an attractive option for an emergency savings account or accumulating cash for a short-term goal, such as a down payment on a home. Not all banks or financial institutions will offer a competitive high-yield savings account and many that do have an online presence rather than your traditional brick and mortar location. It is important to confirm the financial institution is FDIC-insured before making any deposit.
Individuals with a long time horizon who are still in the accumulation stage may consider working a portion of extra cash into the stock market. The S&P 500 is down roughly 17% from previous highs and volatility has increased due to high inflation, the war in Ukraine and supply chain issues, but this may be an opportunity for investors with a long time horizon to put some cash to work. While we do not know what the market holds near-term, we are optimistic over the long-term. We believe that it is time in the market, rather than timing the market, that is most important when it comes to investing your portfolio to continue to work towards your long-term goals. One way to use stock market fluctuations as an advantage is by dollar cost averaging. Investors can do this by investing a portion of your money now, and the remaining portion(s) at later intervals to capture any price differences in market movements over time, reducing the impact of volatility on the overall purchase.
Due to current market conditions, inflation, and rising interest rates, we encourage you to focus on your current investment allocation. For retirees, we suggest keeping 4-7 years of your cash needs in fixed income and cash. Doing so helps investors avoid selling equites during down periods in the markets to raise cash and provides an opportunity to participate as the market recovers. Additionally, within fixed income, we suggest staying short-term. Bonds with a shorter duration will have less sensitivity as interest rates rise and will be reinvested more quickly at higher rates. For individuals who are currently working and live on their earned income, it is important to create and maintain an emergency fund. Unfortunately, banks are only paying around 0.01% - 0.02% currently on a savings account; however, having 3-6 months of your net income in a savings account can help to avoid carrying large balances on credit cards, selling investments during volatile times, and dipping into retirement savings. Regardless of where you fall in the life cycle, it is important to make sure your decision to invest your cash aligns with your short-term needs and long-term goals.