How to invest cash that’s meant for savings is the number one question clients are asking these days. With interest rates so low, keeping cash aside for near term tax payments, home down payments, tuition bills, etc seems fruitless.
Unfortunately, the Fed likes it this way and since they control interest rates in the short term maturities, until they don’t like it, we have to put up with it.
The back story is that the Fed, in order to support the economy, is keeping interest rates as low as possible. Yields on money market funds, CDs, short term Treasuries – all the instruments you use to save with in other words – follow suit. What the Fed wants you to do is move your money out to riskier investments, thereby supplying capital to the economy. But that’s not appropriate for short term needs, because if you take more risk, then the day you need your money for taxes or to cover the wire for your house purchase or to pay the next quarter’s installment at Harvard will be the day the market is down 10%. Your money won’t stay whole in that case, and you’ll have to find more savings.
In investment parlance, this is called mismatching assets and liabilities. You know your bills are due shortly and you know how much they are. You must match your savings vehicle to those considerations, both with respect to time and amount. What you earn is less important than simply having the money be there.
That said, there are a few tricks you can employ:
- Figure out when you need the funds and buy a CD or a Treasury bill due just before that time. CDs often yield more at credit unions or community banks. Try there instead of the largest banks in your market.
- If the time frame is less certain – you plan to buy a house sometime in 1-3 years but you could also find one tomorrow – use a short term bond fund like Vanguard’s Short Term Bond Index fund, which yields 1.3% today. Keep in mind! it may lose money. It trades, whereas CDs do not. So if short term interest rates rise, you could lose principal. But it might be worth that risk if your time frame is on the longer side of short. Sometimes you can even get checking privileges on these short term funds, so when you need money, you can simply use a check.
- Use www.bankrate.com to find the highest yielding money market funds. These will likely be much higher than what your bank offers. As always, be careful if you choose the very highest rate. High rates may come with catches, like a poor quality institution, a lock-up on your funds, fees, or something else.
Happy yield hunting!