Where to Stash Your Cash

Cash may be King, but where should we stash it?

I’m talking about the times we need cold hard cash. Those short, medium, and even long-term goals where investing is not the answer.

For this post, I want to focus on cash accounts with ZERO market risk. These are the savings dollars that need to be safe, accessible, and we hope also might get a little yield along the way if we’re lucky.

Cash In The Bank: Liquidity Over Everything

Short-term savings goals are typically for specific things like an upcoming vacation or holiday, but could also include a more open-ended goal like saving for a home down payment in the near future.

The common thread is that the safety and accessibility of these funds is more important than the interest rate or available yield.

These dollars usually end up in a savings account at the bank earning a fraction of a percent in annual interest.

Safety and accessibility is there with FDIC deposit insurance (up to $250k) and easy withdrawals.

But the average interest rate on a savings account is just 0.06% per YEAR according to Bankrate.com’s weekly survey on Oct. 20, 2021. It’s possible to get slightly higher interest by using an online savings or high yield checking account.

Many times these institutions can offer higher interest because they don’t support a large network of bank branches. So you may be trading in the convenience of a local branch for a higher yield from an online institution, but the ease of online transfers, mobile check deposit, and banking apps can help.

You can easily find an account that pays around 0.50% annual interest. Not great, but again earnings are not the most important thing for short-term goals. For larger cash balances, the extra interest can be worth it.

Savings Bonds & CDs: Trading Liquidity for Yield

Some medium-term goals have a specific end-date, like a down payment that may take several years to build up. But this category can also include more persistent longer-term goals like a new car fund or growing general savings beyond your emergency fund.

These are dollars that we’re not willing to lose, but that we may not need for a while. You may consider giving up some liquidity or access while looking for somewhat higher interest rates for these goals.

Certificate of Deposit (CDs)

These dollars sometimes end up in a Certificate of Deposit (CD) at the bank. CDs operate like an IOU where you get your deposit back plus interest after a set period of time, typically a number of months or years.

But 1-year CDs for example have paid such low rates recently, between 0.50% - 0.75%, that they don’t give much benefit over an online savings account in exchange for the lost liquidity.

Savings bonds issued by the US Treasury are another interesting option. These are the same savings bonds that our grandparents may have purchased for us as kids, but recent economic pressures have pushed the rates on these bonds much higher, at least for the short term.

There are two main types of savings bonds, Series I and Series EE.

Series I Bonds 

Series I Bonds pay a fixed base rate determined when you purchase the savings bond. The fixed rate hasn’t been over 0.50% since 2008, and is currently set at 0%.

However, the main feature of a Series I Bond is a second variable rate based on inflation. Every May and November, this variable rate adjusts to compensate for inflationary pressures.

For example, the current annualized rate set on Nov 1st, 2021 is a whopping 7.12%!! Rates won’t be this high forever, but in the short-term these are stock-market-like returns with none of the associated market risk.

Any Series I Bonds purchased before the rate resets again in May will receive the current annualized rate for 6 months from the date of purchase.

However, I Bonds may not be redeemed for at least 12 months, so you’ll trade in a full year of liquidity.

It’s also worth noting that simply “keeping up with inflation” means you’re earning nothing in real purchasing power, but this highlights just how paltry other savings options can be.

Series EE Bonds 

Series EE Bonds are much less exciting. They also pay a fixed rate determined when you purchase the bond, which is currently just 0.10%.

This initial fixed rate won’t change for the life of the Bond, however the Treasury guarantees that the bond will double in value if held for 20 years.

They will make a one time adjustment at the 20 year mark to ensure they meet this guarantee regardless of the fixed rate. So the inherent rate of return if held for 20 years is 3.53% after it doubles.

That’s not bad, but it’s a long time to wait to see a reasonable return. Probably best to look elsewhere.

More Ways to Save

There are other ways to earn more with your cash, but most involve some amount of principal risk, meaning your cash could lose value.

Short-term bonds and conservative investments come to mind, but for this post we’re focused on options with NO market risk. The good news is sometimes the best deal to be had is already on your balance sheet!

A low interest rate environment presents a good opportunity to clean up higher rate debts. It’s certainly a good idea to keep an emergency fund.

But if you’re searching for greater yields with your surplus cash, and you’re still carrying consumer debt, paying it down is an obvious choice.

A bank may give you 0.50% to keep your cash in your account, but your credit card company will stop taking 20% from you if you pay down your balance, for example.

Both will hit your personal balance sheet, and 20 is way more than 0.50!

Conclusion

If cash rules everything around us, it’s best to make sure those dollars are working as hard for us as we worked for them. Interest on cash savings will never make you rich, but it’s better than a kick in the shins.

Even without market risk, there are options to optimize your returns. The important thing is to know when you will need the money, and how much liquidity or access you are willing to give up in the pursuit of higher earnings. It’s certainly okay if the answer is “none.”

Need assistance? Reach out to one of our advisors today!