By Robert Lange
An important constant in any financial plan is a stable allocation of cash, easily accessible and free from market fluctuations. Whether that’s an emergency fund, designated savings (vacations, vehicle purchase, home renovations, etc.), or just a cushion to help weather market volatility, there are alternatives to leaving it in a standard savings account at your local bank. While interest rates on savings accounts in the 80’s and 90’s reached upwards of 5%, now they’re lucky to breach 1%, hardly making a dent against currently elevated rates of inflation.
However the recent rapid rise in interest rates has created better opportunities to generate yield with extremely low levels of risk, including options that may exceed what is being offered by your local bank. Many FDIC-protected, online-only money market and high-yield savings accounts are offering interest rates as high as 4-5% per year. These rates tend to outpace those offered by brick-and-mortar banks due to lower expenses of not having physical branches.
Popular Direct, for example, is offering 4.4% in an online high-yield savings account, requiring a $5000 minimum opening deposit.
Bask Bank has no such minimum balance, but comes with a lower 4.25% APY.
Sallie Mae’s money market is at 3.6%, but offers check writing, if that is something of value.
One important consideration to note is that interest rates for high-yield savings and money markets are not locked in for any period of time. They fluctuate due to any number of factors, and as such, can go both rise and fall in the future, though the principal of your investment is protected.
Another option that does have fixed interest rates is Certificates of Deposit (CDs). CDs are less liquid, however, as the investment principal is essentially locked away and subject to early withdrawal penalties until the end of the term, which can range from a few months to several years. This illiquidity can be addressed by creating a ‘ladder’, investing in multiple CDs with staggered maturity rates (ie: 1 year, 2 years, and 3 years), ensuring you’ll have access to some of your funds at regular intervals. Currently, CD rates with various online banks are in the 4-5% range for 12 month terms.
A third option to consider is money market mutual funds. Not to be confused with standard money market accounts offered by banks, these follow the same guidelines as other mutual funds, except at a much lower level of risk. Recently, rates have increased dramatically and in some cases now exceed 4.5%. Money market mutual funds can be purchased in most investment accounts and are completely liquid.
There’s no telling if these higher interest rates are here to stay — they could fall or rise even higher — but it is a great opportunity for those with available cash to earn greater return without taking on market risk.
Robert is our newest service advisor and is available to assist clients with account-related requests and questions. He has a background in logistics and warehouse management, using his history with administration to transition into the financial world. Robert and his wife, Christina, reside in the Old North End of Toledo and in his spare time you’ll find him at Rustbelt Coffee working on his latest novel.
Munn Wealth Management is registered as an investment adviser with the United States Securities and Exchange Commission. This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. All readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. 1323GQE