If you haven’t looked at how your cash is invested recently, now is the time.
We always recommend keeping some money in cash for a rainy day but during the past several years, the returns have been paltry. Those days are over. In May, we recommended several good alternatives for earning the best return on your cash. We would like to update you on our favorites since rates have risen substantially since then and our recommendations have changed.
Here are a few alternatives (in order of attractiveness):
Money market funds. Money funds are the most attractive vehicle for cash right now. Yields have risen quickly as interest rates have risen. The current yield of the Vanguard Federal Money Market Fund (which we recommend) is 3.69% or $36.90 on your $1,000 annual investment. We expect rates will continue to rise over the next few months, and the yield on this fund will rise as well. We expect yields to be close to 4% by the end of the year. Money in these funds is accessible immediately.
High-yield savings accounts. We have highlighted these several times. The current annual interest rate on the American Express high-yield savings account is 3.00% or $30 per year on your $1,000 deposit. That's much better than a bank savings account. Banks are paying next to nothing on deposits and we don't see this changing soon. However, we do think high-yield savings rates will continue to rise this year. You can take your money out anytime and these accounts are FDIC insured.
Treasury Bills. Treasuries have just recently become attractive. 6-month Treasury Bills are yielding 4.66% and 1-year Treasuries are yielding 4.7%. These are good interest rates on extremely safe investments. The downside is that your money is locked into these bonds until maturity unless you choose to sell at a loss. We prefer the flexibility of a Treasury money market fund (as mentioned above) while rates are rising quickly since money fund yields will continue to climb in this environment. We expect money funds to offer a better overall return with no liquidity constraints.
CDs and bank savings accounts. Banks are paying almost nothing to depositors. The average interest rate is currently 0.21% on savings accounts. That's $2.10 per year on your $1,000 deposit. CD rates are not very attractive at 1.20% for a 1-year CD and 1.07% for a 5-year CD. In our view, it is not worth locking up your money for those very low rates of return.