Ever since the Federal Reserve first raised the federal funds rate in March 2022, “cash management matters again” for individuals. Let’s start with a definition. Investopedia defines cash management as “the process of collecting and managing cash flows.” At Carlson, the relationship management team wants to ensure that idle cash (i.e., not invested with us) is earning a competitive, high interest rate for clients in this new environment.
First, each person in charge of running a family’s daily cash flows should determine a certain “safety net” amount to set aside in a safe, liquid cash-like investment. Oftentimes, one will hear this referred to as an emergency fund. This process varies for each client but should result in a concrete goal.
Second, where do you park your safety net? We believe a typical bank savings account is a poor option in the current environment. Banks are not being competitive with interest rates paid on savings accounts because they simply don’t need your money. Bank reserves are ample; therefore, they have no incentive to pay a high interest rate.
So, below are three options each investor should consider.
Money Market Account
A money market account is an interest-bearing account at a bank or credit union (lnvestopedia.com). We have seen much higher rates of interest offered from these accounts. At the time of this writing, Bankrate shows most firms offer interest rates greater than 4.5%.
The main advantage of money market accounts is the higher interest rate. However, there are some disadvantages, such as limited transactions, fees, and/or minimum balance requirements. We recommend you do your homework and find a money market account that fits your needs.
US Treasury Bonds/Bills
United States Treasury securities, also called Treasuries or Treasurys, are government debt instruments issued by the United States Department of the Treasury to finance government spending as an alternative to taxation. Lending money to the US government is considered a very safe investment. Currently, all Treasuries maturing in less than two years are earning 5.2% or more.
Certificates of Deposit (CD)
A CD is a savings account that holds a fixed amount of money for a fixed period, such as six months, one year, or five years, and in exchange, the issuing bank pays interest. When you cash in or redeem your CD, you receive the money you originally invested plus any interest.
There are often penalties for redeeming a CD early, so be careful when choosing your maturity and read the details of the offering. There are also likely to be minimums. CD rates have started to be more competitive at the time of this writing, with most over 5%.
Cash management matters! Don’t let idle cash not work for you in what is a dramatically higher interest rate environment than 12 months ago. Please reach out to an advisor at Carlson for any further questions.
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