Get more from your cash
“Cash is king” is not a maxim that has reigned true over the past two decades. During this period, savers looking to make a higher return on their cash have been low on options. In the recent past, high-yield savings accounts were emerging as a good option for cash that needed to be protected before March of 2020. High-yield savings accounts are once again increasing in popularity with rates on online accounts between 2.5-3%.
This is a welcome trend, as those of us holding large amounts of cash are seeing the purchasing power of those funds steadily eroded by inflation running at 8.2% over the past year.
With rates rising, high-yield savings accounts are no longer the only cash-management option if you are looking to earn a higher rate on your cash. Below is an overview of cash management options for those wondering what to do with their liquid wealth in an era when both inflation and interest rates are steadily increasing.
Certificates of Deposit (CDs)
The Federal Reserve’s effort to tamp down inflation by raising interest rates has started to change the calculus for investing in CDs. Younger savers may not be familiar with CDs, which have fallen out of favor over the last 15-20 years due to low interest rates. CDs are FDIC-insured bank products that pay a specified interest rate on a lump-sum deposit for a predetermined amount of time, anywhere from a month to 5+ years. Unlike high-yield savings accounts, CDs are relatively illiquid for their duration.
CDs offered through online banks are advertising rates above 3% for a one-year term, while brokerages such as Charles Schwab are currently advertising 10-18 month CD terms paying 4.6% APY. At these rates, individuals and families who have earmarked cash for long-term needs or are looking for an FDIC-insured place to park a portion of their emergency savings fund, CDs should be back in the picture.
When considering a CD, you should always remember that pulling funds from a CD before the term ends may result in a significant penalty, including loss of principal. There is no federal cap on how much a bank can charge for an early withdrawal from a CD, so those who think they may need access to funds within the CD period should look to other cash management options.
Savers who are sure they won’t need access to funds before their specified CD term ends should start reviewing their rate options. Brokerage firms, companies like Schwab and Fidelity whose customers use them for both investment and banking needs, currently offer the highest CD rates. These higher rates are part of an effort to hold on to the cash deposits of wealthy investors who have increasingly been looking elsewhere (such as to online banks or other financial products) to invest their cash balances. If you already invest with Schwab or Fidelity, you can review advertised rates by reaching out to your investment advisor or checking the brokerage company’s website.
If you don’t have a relationship with one of these companies, aggregation site Bankrate has a helpful overview of retail CD options including rates, investment minimums, and terms.
Series I Savings Bonds (I-Bonds)
Smaller cash balances ($10,000 per individual per calendar year) that won’t be needed for at least the next 12 months may be a good candidate to invest in I-Bonds. I-Bonds are US Government savings bonds intended to protect against inflation. Returns from I-bonds are made up of two components: a fixed rate of interest and a rate that is pegged to the inflation rate and changes every six months.
Because inflation has been running so high, I-bonds purchased on or before October 28, 2022 will pay 9.62% for six months before the rate resets. This rate is extremely attractive, but is tempered by the fact that (1) an individual can only invest $10,000 in I-bonds per year through Treasury Direct and (2) money invested in I-bonds is locked up for 12 months. After the first year, you can redeem your I-bonds but you will forfeit the previous 3 months of interest for any I-bond redeemed before it has been held for at least 5 years.
The other downside of I-Bonds is the purchase process. I-bonds must be bought through the Treasury Direct website, which requires setting up an account and linking your outside bank account. This is not necessarily difficult, but the technology is dated and there are identity verification and linking issues that can arise to cause headaches.
If you are looking to buy I-bonds, try to make your purchase before October 28, 2022. I-bonds purchased on October 29 or later will be subject to a rate reset on November 1st, with interest rates expected to drop from 9.62% for your first six months to somewhere around 6% for your first six months.
High-Yield Savings Accounts
Many savers are familiar with high-yield savings accounts, which started to gain popularity as rates rose in the years leading up to March of 2020. These accounts are exactly what they sound like - FDIC insured savings accounts that earn a higher-than-average rate of return.
High-yield savings accounts are easiest to find through online banks such as SoFi, Ally, Discover, and Marcus by Goldman Sachs, among others. Some credit unions also offer high-yield savings or checking accounts. These accounts generally require you to have multiple other products with the credit union and the interest-earning balance is often capped between $25,000-$100,000.
High-yield savings accounts at online banks do not come with the support or bells and whistles of a traditional banking relationship, but they are a solid option for those looking to earn 2%+ on larger cash balances.
High-yield savings accounts are insured up to $250,000 per named account owner, so an appropriately titled joint account between two individuals would be protected up to $500,000 at one bank.
High-yield savings accounts offer full liquidity and flexibility with your wealth and are appropriate for savers at any level.
FDIC Insurance high-yield savings options for large cash balances
Investors with cash balances greater than $250,000 ($500,000 for joint accounts) often struggle to find safe, higher-yield options for that cash. Thankfully, a variety of solutions have been developed over the past several years that take advantage of technology to protect your liquid cash while it earns a rate equal to or greater than what is available in retail high-yield savings accounts.
Sunnybranch partners with a leading provider of cash management, deposit and liquidity solutions to solve this problem for clients with up to $25 million in cash balances per individual. This offering spreads out your initial deposit (completed through a simple online application) to a network of over 900 partner banks. Spreading cash balances out between a network of banks means that the full deposit is (1) FDIC insured and (2) earns the prevailing market rate of return for a high-yield savings account (2.35% as of October 2022).
You can rest assured with:
FDIC insurance on your full cash portfolio up to $25 million per individual
Market-rate high-yield cash returns
Funds moved to your outside checking account overnight
Simplicity and ease of access with one login to view cash balance and interest earned
Only one 1099 for tax reporting purposes
Easy online setup through a link provided by Sunnybranch
No account fees, minimums, or transaction limits
Can I just buy bonds and forget about “managing my cash”?
Bonds are an important part of your investment portfolio. Although the bond market has had a rough time in 2022 as interest rates continued to rise, maintaining an appropriate conservative allocation across investment accounts is an essential part of success as a long-term investor.
2022 reminded us that bonds carry a degree of risk and are not an ideal vehicle for capital that needs to be preserved for short-term needs or emotional reassurance. This point is proved by the performance of the U.S. bond market, where key indices are off over 15% YTD.
The following cash buckets are not an appropriate fit for bond investments and should be directed into no-volatility vehicles, ideally with FDIC insurance:
Emergency savings fund equal to 3-12 months of living expenses, depending on specific individual or family circumstances.
Cash earmarked for major purchases in the next 1-3 years, including:
New car purchase
New primary or vacation home purchase
Major medical expenses
Planned vacations
Cash from an inheritance, business sale, IPO, or other “sudden wealth” event that will be invested in the market within the next 6-18 months.
It can be overwhelming to determine not only the amount of cash you should be holding, but also the best place to hold it in a time of rising interest rates. Remember that you don't have to answer these questions alone. Sunnybranch Wealth is here to help you understand the role cash plays in your overall financial picture and how to manage cash balances in a return-focused and efficient way.
Contact Katherine or schedule a call to chat about how you can get your arms around managing your cash, explore options to earn a higher return at the same level of risk, and sleep easy knowing your full cash balance is earning yield while being protected by FDIC insurance.
About Sunnybranch Wealth
Sunnybranch Wealth is a boutique, fiduciary, fee-only financial advisory firm that works with progressive individuals and families who want to build their wealth while creating positive social impact.
Sunnybranch specializes in working with millennials and busy families who need help but don’t have time or energy to devote to their finances. We serve as your trusted resource and partner, alleviating the stress of managing your wealth and letting you focus on living your life.
Our founder, Katherine Fox, is a CERTIFIED FINANCIAL PLANNER™, Chartered Advisor in Philanthropy®, and 21/64 Certified Advisor with deep expertise and experience in helping clients build wealth while navigating life’s financial challenges. Her work combines comprehensive financial planning, ESG and impact investing, and charitable guidance to serve clients who want to grow their wealth sustainably while giving back in a meaningful way.