Many people think Jerome Powell, the federal reserve chairperson, is more powerful than the US president. He has been raising the Fed's interest rate in recent months, which is mind-bogglingly important to the world economy. To you and me, a higher fed rate means lending rates for mortgages, loans, and credit cards are all more expensive. That's bad. The good? Highly liquid, cash (or close to cash) investments are starting to payout returns that are no longer laughable. Parking cash in savings accounts, money market accounts, and certificates of deposit (CDs) are paying up to 5% annually and rising!
Ways to Maximize Your Cash on Cash Return
At a high level, there are three types of cash investments: Bank Accounts, CDs (Certificates of Deposit), and Bonds. I'll touch on each. When I was determining where to park my extra cash recently, I decided on an ETF bond fund for the best mix of yield and flexibility.
Savings and Money Market Accounts
I know how daunting switching banks/credit unions can be. But these days, if your bank's interest rate is less than 1% on a savings account, they are short-changing you. Shop around for a few high-yield savings account (HYSA) rates; you'll see most pay in the 4% range. So parking $10,000 in a 4% APY account will gain you $400/year. Opening a high-yield savings account is a no-brainer compared to $1/year in a 0.01% account. And the same goes for money market accounts!
For years I've used Ally bank, an online-only bank that always has a solid savings account rate. The rate is currently at 3.75% on savings accounts and has been rising. Ally isn't sponsoring me to plug them here, but I would recommend them if you don't need to visit physical branches. I deposit all checks using their mobile app, which has a $50k ceiling on mobile check deposits. Another good option is Marcus by Goldman Sachs, which has a 3.90% savings account and a 5.05% 10-month CD.
CDs (Certificates of Deposit) and CD Ladders
Ok, I'll be honest. I've never bought a CD. For my entire life until now, they haven't made sense because of the low returns. The 'catch' of a single CD is that your money can be locked up for many months. CD Ladders are a fun option to layer multiple CDs on top of each other to hedge your ongoing cash needs. A CD ladder works by buying CDs every few months; when they mature, you get money back every couple of months. Many banks and brokerages have online tools to help you build a CD ladder, making it less daunting.
Bonds and Bond Funds
A million options exist for individual bonds, and bond funds help simplify your choices. We previously covered US Government iBonds, which is an attractive return on cash in itself. The iBond rate is still quite attractive, but the website is such utter garbage that I never bought iBonds myself. The "return on hassle" was too high for me, but it might not be for you. The current 6-month rate is 6.89% APY, which is fantastic for parking cash, but will fall to 3.38% when May arrives.
That leads me to what I did buy - an ETF bond fund. Technically, an ETF is a little less liquid than cash, and it is purchased through a brokerage account. The short-term bond fund I bought is SGOV, and it pays out on the first of each month as a cash dividend, which is why the chart is so wonky-looking.
When shopping bond funds, a key data point to compare is the "SEC yield." Unlike the regular "yield" for these funds, the SEC yield is future-looking, projecting what an investor should expect to earn over the next 12 months from dividends and interest after accounting for any fund expenses. The current SEC yield of SGOV is 4.68%, and because it is entirely treasury bills, it is exempt from state taxes.
Parking Cash Wrap Up
Don't forget diversification! Traditional portfolio guidance says cash should be a smaller chunk of your portfolio, much less than 30% for younger people. Also, consider your time horizon, risk tolerance, and inflation. The stock market follows cycles over time. Younger people don't necessarily need to hold a lot of cash-heavy investments because they should be investing for decades. People closer to retirement should lean more heavily on cash-like investments for safer yields on lower risk. From an inflationary perspective, you cannot do much about your money becoming worth less over time, but consider that the purpose of the fed rate hikes is to bring inflation back down. Parking cash in smart investments will preserve your dollars' worth and make you a little extra money when it matures.