Managing cash in a low interest rate environment
by Stephen E. Maggard
With current treasury yields hovering slightly above zero, individuals are experiencing angst over the lack of returns from their cash.
It has only been in the last 2-3 years that interest rates have recovered from their Great Recession lows. High-yield savings accounts and CDs were beginning to pay a respectable rate, but then the bottom fell out in March 2020. Business owners seeking margin and individuals looking to refinance their mortgages celebrated the lower rates since lower rates meant they would pay less interest on their loans.
While low interest rates may be an opportunity for borrowers, they can be a source of consternation for savers and lenders. The situation may leave you wondering, “should I be doing anything different with my cash?”
The answer begins by asking yourself what the purpose of your cash was in the first place. Don’t let the frustrations of a low rate on your savings drive you to make decisions that alter your financial plan. Investors seeking a higher interest rate may turn to bonds or dividend paying stock. When compared to the interest your cash is receiving, these options could be tempting. Yet, the risk of investment loss is likely not worth the potential reward. If you need the funds in the next year or two, it’s probably best to keep the money in cash.
Most individuals are familiar with a savings account. Though a savings account is a small first step in effectively managing cash, the following can make your dollars work a little bit harder:
1. High-yield Savings Account. If you are looking to take a step past the traditional brick-and-mortar savings account, consider opening a high-yield savings account at a reputable online bank. You can link this account to your local bank account and easily transfer funds between the two. Online banks often have much lower operating costs than a traditional bank, and they pass along the savings to their customers in the form of higher interest rates. When evaluating online banks, consider the following:
a. Ensure the account is FDIC-insured. If it is FDIC-insured, then the federal government will insure up to $250,000 ($500,000 for joint accounts) of your funds in the case of bank failure. Use the below FDIC link to see if your bank is insured. https://banks.data.fdic.gov/bankfind-suite/bankfind
b. Keep an eye out for introductory rates. Several banks will offer an appealing introductory rate, then, within three to six months, reduce that rate. Be sure to read the fine print and look for banks with a long track record of consistently competitive rates.
c. Free or refundable ATM charges. Are you concerned about accessing your cash when you need it? Many online banks will either waive or rebate ATM fees incurred from using other banks’ ATMs.
2. If you’re comfortable with online banking, your next step toward maximizing your cash may be a tool called Max My Interest. (https://www.maxmyinterest.com/). With this tool, you keep your existing bank account while Max My Interest works in the background. It finds the best rates and automatically moves your pre-determined savings to the higher interest rate account. You decide how much money can flow between accounts, and you determine which other institutions to use. Setting up multiple accounts can be a bit cumbersome, but in the end, it will automate your cash management while maintaining a competitive interest rate.
3. Money Market Funds provide a similar return as high-yield savings accounts, though most are not FDIC-insured. The fund usually invests your money in short-term government securities. Also, municipal Money Market Funds are available for higher-income earners who would most benefit from tax-exempt yields.
4. Most banks and credit unions offer Certificates of Deposit (CDs); investors can also purchase CDs through their brokerage account. Often CDs pay an interest rate slightly higher than money market funds and high-yield savings accounts, but the investor agrees to leave their money with the institution for a set period. Purchasing a two-year CD means that the institution will hold the funds for two years while paying interest to the investor. Though current CD rates may not justify “locking up” your funds for a prolonged period, some credit unions offer unique CD offerings with special rates to members only. These offerings often come with several stipulations, such as limiting the amount of funds invested and requiring the investor to set up a direct deposit.
It is easy to become disheartened by the historically low return on your cash. If you feel this way, the first step is to remind yourself of the cash’s purpose. If you plan to use the funds in the next two years, your priority should be preservation, despite the dismal returns. Being conservative with your cash doesn’t mean you cash can’t work harder. Adding one of the above tools to your toolbox could help you maximize your cash’s efforts.
Stephen E. Maggard graduated Cum Laude from Presbyterian College in 2012 with a BA in History. After seven years in the US Army, Stephen entered the private sector. Stephen earned a Certificate in Financial Planning from Florida State University in 2020 before joining Abacus in July 2020.
Abacus is a financial advisory and investment counsel firm known for its passion in creating abundance for clients and family businesses through skillful listening and smart financial decision making. Managing over a $1.5 billion on behalf of its 240 plus families, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.