People are holding more cash than usual right now and for good reason. Periods of uncertainty are why people build emergency funds in the first place. Those who were fortunate to keep their job and full salary had a hard time spending money on anything but the essentials. At the same time short-term interest rates have hit rock bottom. Is there any place to earn a decent yield on your cash? Let’s review your options.
A typical checking or savings account earns roughly 0% today. Money you keep there is for convenience only.
Some banks have high yield savings accounts. They may pay you 1% or more if you meet certain criteria (automatic deposits and/or a certain number of transactions). These can be a good option.
Money market accounts are quickly headed towards 0%. My Vanguard money market fund is now paying less than 0.4%. It is hardly worth transferring money there from my bank account.
Online savings accounts still pay 1%-1.5%. I expect those to drop towards 1%. Depending on how much cash you are holding this may as be a good option.
Most CDs pay less than 1% and lock your money up for a period of time (some online banks do offer more). For the most part these are not a good option.
I look at that options and say they all pay close to nothing. We need to get used to the fact that cash does not pay much. If you are willing to jump through hoops, you can get it up to 1% or more. Unless you hold a lot of cash, it may not be worth jumping through those hoops. Earning next to nothing is the price we pay for the stability of cash.
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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.