If you thought cash was headed for the trash heap this year, the Federal Reserve threw you a curveball with interest rates. Cash is still king as inflation ails markets like a lingering cold.
The upside for savers — who now have a near-record $6.1 trillion still sitting in money market funds — according to the Investment Company Institute?
If you have cash in a high-yield savings account, money market fund, CD or short-term Treasury bill, you can still earn princely yields above 5%. And you can take zero risk.
Going For High Interest Rates And Yield
The market got it all wrong, but that's a plus for savers and retirees who count on income to pay the bills. At the start of 2024, Wall Street was expecting inflation to keep falling and was pricing in six or seven Fed interest rate cuts. Now, traders expect just one quarter-point interest rate hike.
"It's becoming more and more difficult to argue for rate cuts," said Skyler Weinand, chief investment officer at Regan Capital in Dallas.
Blame sticky inflation and an economy that keeps chugging along. Consumer prices in March came in hot at 3.5% vs. a year ago, well north of the Fed's 2% inflation target. The higher-for-longer interest rate scenario has been pushed out.
And that's forcing savers to start thinking about cash in a different way.
"The money you have parked in cash is not dead money," said Greg McBride, chief financial analyst for Bankrate.com. "We're in an environment where you're earning more than inflation. And the economy is strong enough that the Fed is not going to be in a hurry to cut rates. So, being able to earn more than inflation on your cash is likely to persist for some time — even once the Fed starts to cut rates."
In Search Of 5% Interest Rates
Now's the time to strategize about how your cash can boost your bottom line, how 5% yields can bulk up your rainy-day fund, and how to lock in high cash yields for as long as possible.
A good strategy is to diversify your cash in a way that meets your short-, medium- and long-term goals. Putting cash in three different buckets can solve your cash needs based on when you need to tap your dollars.
Stash Cash For The Short Term
You need cash to prepare for surprises. Those might be a bigger-than-expected tax bill or costly car or home repairs. Planning for unexpected expenses is where that all-important emergency fund comes into play.
"And that means money that you can access without penalty at the drop of a hat," said McBride.
Right now, you can earn over 5% on cash in money markets and high-yield savings accounts, says Bankrate. So you not only have money at the ready if you get hit with an unexpected expense, but you also earn a positive return after inflation is factored in.
Avoid Costly Credit Interest Rates
Another unappreciated aspect of having an emergency fund with a competitive yield is it saves you a lot of money if trouble strikes.
"Not having cash at your disposal can cost you a lot of money," said McBride. "Having to access cash when you don't have it but need it ends up being a very costly proposition."
Case in point: If you use a credit card in a pinch, it's going to cost you. The average interest rate on a new card is 22.87% and 21.59% on existing cards, according to WalletHub's latest Credit Card Landscape Report.
Taking out a personal loan will pinch the budget, too, with the average rate now at 12.18%, according to Bankrate. And while you can also tap the home equity in your home, which has risen due to rising home prices, the average rate for a home equity line of credit, or HELOC, is north of 9%, Bankrate data show.
Stay Liquid
And don't forget that funding a liquid, easy-access rainy-day fund also gives you dry powder in the that event stocks, which have come under pressure in April after hitting fresh highs in this year's first quarter, suffer a correction. You can use the cash to buy shares at cheaper prices.
"You'll be able to put money to work in the market at a moment's notice," said McBride.
With cash yields to be had north of 5%, there's also nothing wrong now with taking some chips off the table in the stock market and beefing up your cash holdings for a rainy day, adds McBride. "It's a way to reduce risk, but you're also not diversifying away the prospect for attractive returns," he said.
Invest Greenbacks For The Intermediate Term
If you don't need your cash immediately, now's an opportune time to lock in today's higher rates on cash for longer. There's really no need to have $10,000, $15,000, or even $25,000 sitting in a checking account earning zero interest.
Having a savings account that doesn't move the needle on your account balance "just because it makes you feel good" isn't ideal, adds Justin Stivers, financial advisor and founding attorney at Stivers Law in Coral Gables, Fla.
Stivers recommends doing an "inventory" of your cash holdings to see how much you have set aside and what you're earning on your money.
A better way to play it is to lock in higher rates for longer. There are a few ways you can do that.
One way is to create a CD ladder by buying CDs with maturities of one, two, three, four and five years. That way, you gain liquidity each year as at least one CD matures. You then have the option to reinvest at current market rates or keep the cash if you need it.
Currently, you can find 12-month CDs with yields north of 5%, according to Bankrate. And you can get at least 4% for CDs that mature in two to five years.
Build A Bond Ladder With Interest Rates
McBride says building a bond ladder is a good way for retirees to "set up a predictable stream of interest income."
Another option is to invest in U.S. government securities, such as short-term Treasury bills with maturities of six months to a year or Treasury notes with maturities of two to 10 years, says Sam Millette, senior investment strategist at Commonwealth Financial Network.
"There's opportunity in the Treasury market to lock in higher yields," said Millette. "We've had some pretty noticeable yield pickups recently."
For example, Treasury notes ranging from two-year maturities to seven-year maturities have seen their yields rise three-quarters of a percentage point since the start of the year. Yields range from 4.967% on the two-year note to 4.666% on the seven-year note.
There's also a tax benefit from taking advantage of the higher rates now offered by Treasuries. While U.S. Treasuries are taxable at the federal level, gains are exempt from all state and local income taxes, according to the IRS.
"Those tax savings can be beneficial, especially for clients in states with high income tax rates," said Millette.
Game The Next Fed Cuts To Interest Rates
The final bucket to put cash into is intermediate-term bonds. They now carry competitive yields but also will provide the opportunity for capital appreciation when the Fed finally starts to cut interest rates.
Investors have a good chance to boost their returns by thinking a few moves ahead, says Seth Meyer, global head of client portfolio management at Janus Henderson Investors.
Cash, unlike bonds, does not benefit from falling yields. Remember, the price of a bond is inverse to its yield. So, when the Fed starts to cut rates, bonds will rise in price, delivering capital appreciation to investors.
Buying bonds with intermediate maturities, such as two to seven years, could prove profitable once rates begin to fall.
"We believe investors should be positioned for the next phase in the cycle because once markets do move, they are likely to move too fast for investors to react in time," said Meyer.
An easy way to play it is to invest in the midpoint of the yield curve and invest in a low-cost bond ETF that invests in three- to seven-year bonds.
