During this interest rate hiking cycle, an opportunity has been presented for investors to manage their cash much more effectively than in the past decade. In today’s article, we want to walk you through the options available and how to make the best decision for your personal finances.
- Reconsider Your Savings Account
Traditionally, savings accounts have been a popular choice for holding cash due to their liquidity and low-risk nature. However, savings accounts typically have low-interest rates, and the interest earned is usually much less than alternatives. It is our opinion that investors can earn more interest and maintain liquidity without much additional risk to their cash.
- Consider Money Market Mutual Funds
A money market mutual fund is a type of mutual fund that invests in short-term, low-risk debt securities, such as U.S. Treasury bills, certificates of deposit, and commercial paper. Money market mutual funds are considered a cash equivalent vehicle and are often used as a place to park cash for short periods of time. Depending on the mutual fund, interest rates may vary. Below is a common fund we like to consider for investors cash equivalents, FNSXX, which is yielding 4.82% annualized currently.
It is important to note that these products are not FDIC insured. However, money market mutual funds are subject to strict regulations and have historically maintained a stable NAV of $1 per share. The Securities and Exchange Commission (SEC) requires money market mutual funds to hold investments with maturities of less than 13 months and to maintain a weighted average maturity of no more than 60 days. This limits the interest rate risk and credit risk exposure of the fund.
Money Market Funds make sense when you want to maintain liquidity, earn more interest and are ok with fluctuating interest rates paid on your cash. If you want to lock in a rate for a specific time and will hold that cash to maturity, we explore the two most common options next.
- Reconsider Certificates of Deposit (CDs)
CDs are a type of savings account that typically offer higher interest rates than traditional savings accounts. CDs require a deposit that must remain untouched for a specified period, typically ranging from 3 months to 5 years, to earn a guaranteed interest rate. CD interest rates are generally higher than savings accounts, but they are locked in and can’t be accessed without penalty before maturity. The interest rate on CDs varies depending on the length of the term and the amount of the deposit.
Current Average Annual Percentage Yields as of April 5, 2023: 1.68%
- Explore Treasury Securities
Treasury securities, such as Treasury bills, notes, and bonds, are issued by the U.S. government and are considered to be among the safest investments in the world. In a higher interest rate environment, Treasury securities typically offer a higher interest rate than other cash investments. However, they are subject to interest rate risk and may decrease in value if interest rates rise.
Treasuries make sense if you plan to hold the investment to maturity. The price of the treasury can fluctuate depending on the current interest rate environment, but if it is held to maturity, the investor will receive their principal and interest back as long as the U.S. Government doesn’t default on their debt, which has never happened in the past.
Current 1 Year Treasury Rate: 4.67%
While there are many options to manage your cash, we urge investors to investigate this more deeply considering the higher interest rate environment we are experiencing. Many people are leaving money on the table by not taking action or sticking with the traditional, convenient options.
Presented by the Financial Planning Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.