Does Your Cash Work For You?
To help tame inflation, the Federal Reserve has continued to make incremental interest rate increases. In direct correlation with these rate increases we also see a rise in rates for Certificates of Deposits (CDs), US Treasury securities, and money markets. At Lighthouse Financial Advisors, our goal is to help our clients build their portfolio in a way that makes sense for them and often this means building around their spending plan. Thinking with the end in mind and communicating the importance of a holistic approach are crucial to the process when working with fixed-income strategies.
Treasuries & Certificates of Deposits:
- Both of these fixed-income vehicles are designed to have minimal principal risk with an average maturity of 1 to 3 years. Currently, the yield curve is inverted – meaning short-term rates are more favorable than long-term rates. It is important to evaluate the current liquidity of your portfolio as well as your cash flow needs prior to making these purchases since these investments have “handcuffs” and would not be accessible for emergency needs.
- Certificates of Deposits (CD) – considered the safest investment due to the Federal Deposit Insurance Corporation (FDIC) of $250,000 – a great layer of protection, especially with recent banking issues as seen with Silicon Valley Bank and Signature Bank. Average CD rates are about 4.8% on a 1-year purchase and 4.7% on a 2-year purchase.
- Treasury Bonds – although not backed by FDIC like CDs, these bonds are fully backed by the U.S. government, making this a risk free investment. This income is only subject to Federal tax and exempt from state-local tax. Current US Treasury bonds are about 4.82% on a 1-year purchase and 4.24% on a 2-year purchase.
Money Market Funds & High Yield Savings Accounts:
- Money market funds – These are typically purchased in your brokerage accounts and offer liquidity with a very low level of risk. These funds invest in ultra-short duration treasuries while remaining 100% liquid unlike Treasury bonds and CDs.
- High Yield Savings accounts –These online accounts yield higher interest rates than typical savings accounts. We recommend you take the time to find out what your savings account interest rate is to determine if a high-yield savings would earn you more interest. A high-yield savings is typically the best place to keep your emergency reserve or ”sleep at night” money. FDIC is available up to $250,000 for individuals & $500,000 for joint accounts.
- It is recommended only to have funds up to FDIC limits to stay protected. If you have more than $250,000 as an individual or $500,000 as a joint account, it is suggested to move excess funds into another institution or to the money market fund in your brokerage.
- When exploring fixed-income investments, we do not advise chasing yields. Increasing interest rates have made many of these options attractive, but confirming your cash flow and spending plan is a necessity prior to making any decisions. Creating a plan and sticking with it gives you a great opportunity for sustained success.
Sources:
- https://www.cnbc.com/select/how-do-increasing-interest-rates-affect-inflation/
- https://www.cnbc.com/2023/03/08/want-a-risk-free-5percent-return-how-to-buy-a-3-month- treasury.html
- https://www.fdic.gov/bank/historical/bank/bfb2023.html
- https://www.wsj.com/articles/as-bond-market-turbulence-eases-companies-borrow-again-c8e72516
