Hugh F. Wynn
Need to Stash Cash? You Don't Have to Take It to the Bank
Banks aren’t the only game in town when you need to stash cash. There are better options out there - you just have to know where to find them and the pros and cons of each. Let's take a look at some of my preferred cash storage alternatives to bank savings. Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
With almost everything in your portfolio taking a good whipping right now, and with the Federal Reserve jacking up interest rates, the national average yields on savings accounts at banks have doubled this year – to .14% – a big whoopee. Let's face it...bank savings accounts are safe but just don't reap rewards (higher than .14%).
When you want to make cash on your cash look around for better options. Some good places to start are money-market mutual funds (MMAs) and U.S. Treasury securities (I-Bonds and T-Bills).
ABCs of MMAs
An MMA is an investment vehicle, a type of mutual fund that allows an investor to earn interest on cash reserves within a portfolio – usually money left over from transactions – cash held until it can be invested in other instruments. Instead of simply depositing money into a bank savings account, with MMAs investors buy and sell fund shares or units of relatively safe vehicles that mature in a short period of time. These include T-Bills and CDs. Meanwhile, funds pay dividends to investors based on short-term interest rates.
For comparative purposes:
Both MMAs and bank savings accounts are relatively safe. However, bank savings accounts are insured up to $250,000 per depositor by the FDIC while MMAs are not.
Banks use money in savings accounts to invest in stable, short-term, very liquid securities. MMAs invest in relatively safe vehicles that also mature in a short period of time, usually within 13 months.
Bank savings accounts have been and are still paying about as close to zero as your tight-fisted banker can get by with. However, things have changed in recent months with regard to MMAs. The Crane 100 index of large MMA funds yielded 2.64% this week (early October), up from 0.02% in February…and up from 2.01% at the end of August. In early October, approximately 380 money market funds were yielding 2.5%+ averaged over the past seven days. That includes the big boys like Vanguard and Fidelity Investments.
Bank savings and/or CDs are slower to adjust. MMAs can adjust daily…but, of course, that adjustment can be up or down.
If you go with an MMA, watch those “sweep accounts” that some brokerage firms angle you into with an affiliated bank. These are accounts for dividend and interest payments that your stocks or other investments earn. Such accounts store your cash, but often earn much lower returns. If you find this happening to your money, you should consider transferring cash from them into MMAs offering higher available rates.
Now, about dear old Uncle Sam. Remember those inflation-protected savings bonds (I-Bonds) you’ve heard me talk so much about lately? They are securities issued by the US Treasury and are currently offering a 9.62% annual yield for the following six months if you buy before the end of October – a yield that will change on November 1, depending on the latest update to the inflation rate in October.
September CPI numbers used to compute the I-Bond rate for the six months beginning in November 2022 were set to be released on October 13. Bonds bought from May through the end of October 2022 will earn 9.62% for six months before adjusting to reflect the new inflation data. Even at the anticipated lower interest rate, I-Bonds are likely to offer a yield that is at least 2 percentage points higher than a 30-year U.S. Treasury bond (and more than 40 times the average U.S. savings account interest rate).
For the six months after November 1, I-Bonds could pay more than 6.4%, if inflation comes in as expected. And why might the inflation-adjusted rate fall so much if inflation continues to grow? Although annual inflation has remained near the highest levels since the early 1980s, monthly inflation has slowed, including 0.1% and 0.0% monthly gains in July and August. The formula for I-Bond interest looks back only six months. Still, although the rate on I-Bonds will change on November 1, they will continue to look attractive – especially for folks who locked in their first six months at the current 9.62% rate. (Source: Wall Street Journal).
If attractive, you can buy more I-Bonds at those new rates subject to annual limitations. An individual is limited to $10,000 per account per year, and must hold them for a minimum of one year. Also, the buyer will forfeit three months’ interest if the bonds are redeemed within five years. So, be aware that I-Bonds aren’t as flexible and as liquid as cash during that first year of ownership, But they provide an attractive yield as long as the nation continues to suffer from high inflation.
Uncle Sam has some additional attractive options in other securities right now. Take the yield on three-month U.S. Treasuries as an example. A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less and are usually sold in denominations of $1,000. They are widely regarded as low-risk and secure investments and have risen by more than 3.25 percentage points this year (a greater increase in nine months than in any full year going back to 1981). And Old Sam’s one-month T-Bill yields are in the neighborhood of 2.6%, which is up from 0.05% back on January 1, 2022.
You can purchase T-Bills from Uncle Sam at TreasuryDirect.gov, unless you prefer doing it through a brokerage firm. TreasuryDirect is free, but many brokers also charge nothing on new issues. And these puppies are risk-free, unlike MMAs, because they are backed by the full faith and credit of Uncle Sam. TreasuryDirect is the safer route (Sam only owes $31 trillion to various folks around the world…gulp). And yes, Treasury income is often exempt from state and local taxes.
Some folks build ladders of Treasury securities with maturities at constant intervals between one month and one year. Such an approach provides extra income without having to sell stocks in a falling price market. Others stick to one-month T-Bills and automatically reinvest (roll) each bill for as long as desired.
With one- through seven-year Treasuries currently yielding more than maturities of 10-year bonds, one might be tempted to buy nothing but short-term Treasuries. But interest-rate changes are unpredictable. So use good judgment in determining what fits your personal situation the best. You’re sitting on cash for a reason. If you convert to a security with certain limitations, ensure that it still serves your ultimate short-term goal of both liquidity and principal preservation.
At least for the moment, you have more choices than storing it with a banker who pays you little or nothing for the privilege. Shop around. Earn that difference for yourself instead of “gifting” it to those hard-eyed bankers. I can guarantee you that they shop around, investing your money at much higher rates than they pay you.
Eye to the Future
Looking down the road…mid- to long-term…with yields on low-risk, short-term Treasuries heading toward and perhaps exceeding 4%, investing a greater percentage of one’s resources in the safety of government bonds (and perhaps engaging in a bit more stock picking versus passive index fund investing), just might make sense. In short, a looming future of higher interest rates is liable not to be as kind to passive investors as has been the case in recent decades – a lengthy unicorn period of low inflation, slow growth and very low interest rates.
The near future might not be the type of environment a buy and hold investor thrives in. Just a thought.