Put Your Cash Stash to Work
High yielding savings accounts once again available – but not at your retail bank.
In recent years, interest rates were so low everywhere that people forgot about the allure of high yield savings accounts. Before rates were driven to near 0, online banks like Ally or ING were offering savings accounts that promised returns many times higher than the typical bricks and mortar banks. When rates fell, they still offered higher rates, but moving money around to get 0.01 percent instead of 0.005 percent did not have much appeal.
Now high yield is back. A brief search online finds well known firms like Goldman Sachs, Capital One, CIT, and TIAA all offering rates of 3-4% on regular savings accounts, and over 4% on short term CDs.
If you have $50,000 worth of emergency cash reserves sitting in the bank that you don’t need this month, consider setting up an online account and link to your checking. At 4%, you will be paid $166 every month for doing nothing. With almost immediate transfer ability this should be your go-to strategy for your emergency reserve funds. There is no reason to keep any more money than you need for this month’s expenses in your local bank.
As always, we believe that funds more than six months’ worth of expenses should really be invested for the long term in a diversified portfolio. Even here though, cash can make up a more meaningful part of one’s asset allocation. Fifteen months ago, we wouldn’t dream of holding more cash in a client’s portfolio than was necessary for liquidity needs. But now times have changed. While not exactly “cash”, we have a much larger percentage of our client assets invested in “near cash” short term CDs and government bonds yielding 4-5% or more. These instruments provide meaningful diversification to stocks and bond funds, which as we have seen over the past 15 months are both subject to losses when interest rates soar.
What about I bonds?
If you remember, last year we were all excited about US government I bonds. I am a little less enthralled now. It’s not so much the interest rates. I bonds are still one of the only instruments with government guaranteed interest that is keeping up with inflation, currently paying about 6%. My problem in recommending I bonds is the experience of buying and owning them. The government website, treasurydirect.gov, is absolutely awful. And if you need to reach someone for help logging in, wait times are off the charts. I currently need help logging in to my own account and have been unable to reach a human being at all! The idea of putting $10,000 a year into a black hole where I might not be able to get it out when I need it just gives me the shivers. I know the money is safe and earning good returns. I just don’t feel good when I can’t see It or access it when I want to! This also leads to an estate planning question. If you die owning I bonds – make sure someone knows they exist. Since they are not on a brokerage statement, and the government sends no physical acknowledgement of their existence, your executor may have no clue that you own them. And (this is true for all accounts – but especially your I bonds)– make sure your final instructions include w your account login credentials.