Until recently investors have been earning very close to zero on their cash holdings. However, Federal Reserve has been aggressively raising interest rates this year, which eventually does translate to higher interest on deposits. After a few increases, rates on your cash at various institutions are starting to get interesting. To be sure, with inflation at 8%+, earning 2% on your money is not particularly appealing but it’s still better than nothing.
The table below shows rates on select cash alternatives as of 8/29/2022. Traditional banks are still paying nothing, which is unlikely to change anytime soon. FDIC-insured cash deposits at most brokerage firms aren’t particularly appealing either with 0.25% at Schwab. With a little extra work, moving your money to a High Yield Online Savings account, such as Ally or Marcus, might be a good option for many savers. If you are willing to lock your money up for a while, you can get pretty attractive rates on short-term CDs. These are brokered CDs that we can purchase for you at Schwab. CDs at your local bank are still mostly unappealing.
Another easy, but high-yielding option, is a money market fund at your brokerage firm. Vanguard’s default cash sweep option is a solid Federal Money Market fund that pays 2.12%. Unfortunately, Schwab doesn’t offer a Money Market sweep option and cash defaults to the 0.25% Bank Sweep. We did recently move several clients with large cash holdings to the Money Market fund that pays 2.2%. You just have to plan ahead and give it an extra day to sell the fund (you sell it like any other mutual fund).
Finally, 6 month Treasury bill might be the best deal out there at the moment. You can buy those on Treasury Direct or at your brokerage firm. Note: I Bonds are an excellent deal right now, but you are limited to $10,000 a year, unlike regular treasury bonds that can accommodate virtually any amount.
If you have significant cash holdings and would like to explore your options for earning better interest, please reach out to us.