Interest rates plummeted during the financial crisis of 2007-2008, and they’ve only recently recovered. You can increase earnings on your cash deposits like in the old days!
You may not have noticed because it’s unlikely your bank has automatically started to pay you a higher interest rate. Most banks have been content to use their customer deposits at “savings account” and even “money market” rates that are still less than 1 or 2%.
If you want to increase earnings on your cash, you’ll need to seek out the opportunities. Here are some options to consider –
High-Yield Savings & Money Market Accounts
Some banks are advertising high-yield savings or money market accounts that will pay higher rates of interest. The FDIC insures your account up to $250,000, but you may encounter restrictions on the number of transactions you can carry out monthly.
Certificates of Deposit (CDs)
CDs are issued by banks, and they are insured by the FDIC up to $250,000. They are designed to be illiquid for the period of the CD, so you should expect to pay a penalty if you terminate early.
To give you access to a portion of your money every month, you may find it advantageous to “ladder” your CD investments.
Typically, the highest rates are available through “brokered CDs” (i.e., CDs purchased through a brokerage account). The practical difficulty to overcome with brokered CDs is “renewing” them. When one CD matures, you may find yourself “uninvested” for a week before you buy another. That means you won’t be earning a return during this period.
Treasury Securities
Because they are backed by the full faith and credit of the United States government, U.S. Treasuries are considered “risk-free” investments. Your options are Treasury bills (short-term), Treasury notes (medium-term), and Treasury bonds (long-term). If you want liquidity and don’t want to risk losing principal, avoid the longer maturities. That’s because your bonds will lose value if market interest rates rise.
Corporate Bonds
Large corporations often issue bonds to borrow money. The interest return will be better than Treasury securities, and while often considered low-risk, they are not insured. You’ll also assume the risk of rising interest rates that will devalue your investment.
Short-Term Bond Funds
Offered through brokerage accounts, short-term bond funds can be a reasonable option to park short-term cash. Whatever your desired risk level, you’ll find a fund to meet your needs. If you prefer a very low risk, you’ll find funds that invest primarily in Treasury bills with additional income generated by securities lending transactions. The convenience of this option, including daily liquidity, may offer an attractive risk-return ratio; however, the funds are not insured.
Summary
To increase earnings on your cash, consider your risk tolerance, liquidity needs, and investment objectives. There are many options available, but the most important thing is to make your money work for you.
Dan Weiss, founder and President of Counterpart CFO, leads a team of flexible, part-time CFOs specializing in nonprofits. To read more from Dan, follow him on LinkedIn or subscribe to his blog at www.counterpartCFO.com.