I’ve been a financial advisor long enough to remember the last time cash earned more than 5%. That was back in February 2007, before my jet black hair turned into a sea of salt and pepper. Things got weird when the global economy collapsed the following year. In an unprecedented move to help pull us out of the worst economic event since 1929, the Federal Reserve adopted a zero interest rate rate policy (ZIRP) and implemented quantitative easing (QE). Yields on cash equivalents such as savings accounts, money market funds, certificates of deposits, and Treasuries all plummeted to historic lows. From the Fed’s perspective, holding cash (as opposed to spending and investing) might as well have been un-American.
Things remained this way for more than a decade. But just as rates began to rise again, the Fed sent them back to zero as part of our COVID response, injecting trillions of dollars into the economy to avoid another financial crisis. As a result, Americans were flooded with cash–our personal savings grew to all-time highs. It didn’t take long for people to spend that money. The U.S. economy became scorching hot, causing inflation to surge to levels not seen in more than 40 years. To cool down inflation, the Fed pivoted and began to aggressively raise rates. Since early 2022, the Fed has hiked rates eight times in hopes of quelling consumer demand and consumption. However, Americans didn’t get the memo. Personal spending continues to increase. While the Fed’s battle to control inflation rages on, interest rates have climbed higher and higher.
As a result, high-yield savings accounts and money market funds are now earning above 4%, while short-term Treasuries, called T-bills, are fetching as much as 5%. For the first time in more than 15 years, holding cash is, dare I say, attractive. Don’t want to go that far? Fine, but paying attention to where you hold your cash is key right now, because there are yield opportunities that no financial institution will automatically apply for you.
If your cash is sitting in a checking account or savings account with your bank, you’re probably earning close to nothing. One way banks make money is by earning a spread on cash you have deposited into their accounts. They have no obligation to offer you something greater than 0%; but they do, at some point, have to compete against other financial institutions. Since rates have moved so quickly (and most people have no idea how to research these things), many institutions know their customers will simply leave their deposits right where they are. In other words, they know our money is sticky. Our human nature is to do nothing rather than something, even when it’s in our best interest. No pun intended.
So, how can you receive the most bang for your buck?
Enter high-yield savings accounts (HYS). These are FDIC-insured savings accounts that earn interest at a rate greater than traditional savings accounts. The highest yield I’ve seen while writing this week’s newsletter is 4.25%. You can open most of today’s popular high-yield savings accounts online and link them to your personal checking account through a portal. You can transfer money back and forth; it generally takes 24-48 hours to move money between accounts. Because of their attractive yield and ease of use, high-yield savings accounts have now become table stakes for holding your cash. Outside of needing same-day access to your money, there’s little reason to not use them.
You can earn interest above and beyond high-yield savings accounts through Treasury bills (T-bills). T-bills are short-term debt securities issued by the U.S. government with maturities ranging from one month to a year. Investors who buy T-bills essentially lend money to the government and are guaranteed to receive their principal back at maturity. T-bills are purchased at a discount to their face value, and the difference between the purchase price and the face value received at maturity is your return. T-bills are considered risk-free and highly liquid. They can either be purchased directly though the Treasury Department or in a brokerage account. Lastly, they are exempt from state and local income tax.
T-bills are a great way to maximize the yield you earn on your cash. Unlike high-yield savings and other cash equivalents, T-bills let you lock in current rates for up to a year. So, if rates begin to fall in the near-term, you get to keep today’s higher rates until the bill matures. The opposite, however, is also true. If rates continue to rise, you are stuck with the rate at which you purchased your existing T-bills. But candidly, it’s hard to imagine interest rates will be moving significantly higher than where they are now, given that the Fed is expected to stop hiking rates later this year.
The best place to use T-bills is for cash you don’t anticipate touching for at least three months. People with healthy cash reserves, for example, can carve out a portion of their savings for T-bills. You might also consider splitting your cash between a T-bill and a high-yield savings account, thereby maximizing their yield but staying as liquid as possible. Those saving for a home may also benefit from purchasing T-bills.
I can admit, Treasuries are boring. I never thought I’d be writing about Treasury bonds. I certainly didn’t think I’d be speaking about them with my clients on the regular. For both beginners and seasoned investors alike, they are as basic an investment as it gets. But as a financial professional, I know they are important, because they can help strengthen the foundation on which we build our financial lives. And never say never, I guess. Once again, we are witnessing the financial consequences of living through unprecedented times.
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If you’ve been getting crushed in the markets like Brayden, 15, and his buddies from homeroom, you’re not alone. But Treasury yields are currently surging. Right now, you can earn a 5.0% yield on your cash when you purchase government-backed Treasury bills.* That’s a higher yield than a typical high-yield savings account.** The problem is that buying US Treasuries has been super complicated—or at least it was. You used to have to go to a bank or navigate a government website that looks like it was designed in 1996.
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Engaging write-up, Doug 🙌
I’ve talked more to clients about treasuries in the last 3 months than the last 15 years combined! I feel this article 😊