Are you looking to earn more on your cash? Are you tired of earning pennies of interest on thousands of dollars that you have sitting idle each month? Okay…take more risk. That’s the only way to do it. There are many products that have been created to offer better interest rates than money market funds. These products, often called ultra short-term bond funds or short maturity bond funds, take more risk. How much more? Let’s do a quick comparison.
- Savings accounts and money market funds offer price stability and pay very little interest today. Most pay 0.01%, although you can find online savings accounts offering as high as 0.40%-0.50% (yawn) for now if you open a new account. My experience is that most of those are teaser rates that go down over time. Yet, all these options are likely to protect your money from losses in the next crisis.
- Ultra short-term bond funds stay stable in good times (moving a penny or two in price most days). However, when the pandemic hit last year, they dropped 2%-3%. Your $1,000 became $975. In return for taking some variability, you can earn close to that same 0.50% you can find on a high yield savings account today (yawn again).
If you want to earn more than 0.50%, you need to take even more risk. Given how low all bond yields are, you might consider recalculating how much cash you really need. Money that’s needed for upcoming purchases and for emergency needs should remain in cash/money markets. Beyond that, you might want to take more risk – like in a diversified portfolio. That’s more promising than chasing incremental yield on short-term money today. Simply hold less short-term money. How much? I can help you calculate it.
About the Author: John O’Connor
John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.