Interest rates are at their lowest: get a competitive rate of return on your money
By Bennett C. Whitlock III
Whitlock Wealth Management
Investors have been forced to contend with an extremely low interest rate environment for an extended period of time, creating challenges for those who need to maintain a level of liquidity in their portfolios to protect their investments or who are saving for goals. short term.
According to the Federal Deposit Insurance Corporation, the national average savings deposit rate is 0.05% .1 At this rate, for every $ 1,000 you keep in a bank savings account, you will earn interest of 50 cents over the year, leaving many to look for other investments to earn more than average
return of a savings account. Below are five alternative investment solutions for cash – each with their own advantages and disadvantages – that you may want to consider in this low interest rate environment.
Money market funds
Money market funds are generally as liquid as savings accounts, but often offer slightly higher returns. In many cases, you can even get ATM access to cash in these accounts with check writing privileges. These funds, which are provided by mutual fund companies and brokerage firms, do not enjoy FDIC protection like bank accounts.
Certificates of deposit
CDs are similar to savings accounts, and when offered by banks, they are FDIC protected. However, they limit your liquidity. You block your money for a fixed period of time (from one month to several years). Rates are guaranteed and generally higher than for savings accounts, although in today’s environment CD yields are often only slightly more attractive. There are penalties for early withdrawals, so you need to be sure that the money can be set aside for a set period of time. If you can commit dollars
over longer periods of time, you can build a “CD ladder” by investing money in a series of CDs with different maturities. As a CD matures and money becomes available, you can invest it in a longer term CD, usually earning a higher interest rate. Over time, funds periodically become available as CDs arrive in
US Treasury securities
Short-term government-issued bonds are available with varying maturities, typically paying more competitive rates than bank savings accounts. The terms range from one month to 30 years. For shorter-term money, you can consider instruments that range in maturity from one month to two years. The principal is protected by the full faith and credit of the United States Treasury and is still considered the norm
for reliability among debt issuers. If you need cash before a treasury security matures, it can be sold on the open market.
Short term bonds
If you are setting money aside for goals in three to five years, bonds that mature within that time might be an option to consider. These tend to be less sensitive to the impact of changes in interest rates than in the case of longer-term bonds, which eliminates some of the interest rate risk associated with owning bonds. (but be aware that these bonds can lose value when the wider market’s interest rates move higher). Issuers range from the US Treasury to corporations, local and state governments. Local and state government bonds pay interest that may be exempt from federal and sometimes state income tax. Short-term bond funds are an additional option.
Stay consistent with your plan
Any cash management strategy you pursue should be consistent with your overall financial plan. Your financial advisor can help you explore your options and assess which alternatives to traditional bank savings accounts are best for you.
1 Federal Deposit Insurance Corporation, “Weekly National Rates and Rate Caps – Weekly Update”, for the week of January 11, 2021.
Bennett C. Whitlock III, CRPC®, is Private Wealth Advisor and Managing Director at Whitlock Wealth Management, a private wealth advisory practice of Ameriprise Financial Services, Inc. He provides financial planning and asset management strategies fees and has been in practice for 22 years. To contact him, call 703.492.7732 or visit whitlockwealth.com. Ameriprise Financial Services, Inc. Member of FINRA and SIPC