Economic News

Cash Is No Longer Trash When It Comes to Yields

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Ray Dalio, the founder of hedge fund giant Bridgewater Associates, coined the expression “cash is trash” in a famous 2018 interview. He was describing an investing climate in which interest rates were so low that holding cash, cash equivalents, and various sorts of bonds made little sense.

His premise was that investors were being forced into the stock market in order to generate a positive return on their investment.

Well, times have changed, and so has Dalio’s perspective on money. He said on Twitter in October, “I no longer think cash is trash.” This recent announcement is both good and bad news. Those driven into stocks and low-yielding bonds have suffered unprecedented losses in 2022.

However, for individuals who have been subjected to ultralow interest rates and earning nearly nothing on their capital for years, the current environment may represent a golden period of comparatively high yields on lower-risk investments.

However, if you are one of the lucky/smart ones with funds to invest, choose wisely, since this new administration has yet to find its footing, providing both opportunities and perils in the pursuit of income.

Deposits in a bank

Your cash in the bank is FDIC insured up to $250,000 ($500,000 joint), easily accessible, and earns interest. However, on average, those rates have not kept pace with the sharp rises in the federal funds rate. Put another way, banks take your cash, invest them in a yielding asset, and then pass relatively little of the advantage on to you.

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Don’t allow them to get away with it.

Compare rates at various banks and credit unions; you’ll likely be surprised by the differences. Websites like Bankrate.com can make it simple to shop for rates. Currently, a huge institution such as Bank of America offers only.04% on savings, compared to more than 3% at some smaller banks.

Finally, don’t overlook the low-hanging fruit when it comes to money management. If the interest rates on your checking and savings accounts differ significantly, keep more cash in the latter and only what you need for bill payments in the former.

Do you remember CDs?

Most banks provide certificates of deposit. They often pay more than checking and savings accounts, but in exchange, you must tie up your money for a set amount of time before withdrawing it.

The problem is the same as with conventional bank accounts: on average, they are not keeping up with the rising-rate environment. The average one-year CD yields significantly less than the yield on a one-year Treasury bill.

Treasuries

So, what happens to your deposits and CDs? They mostly purchase US Treasury bills, notes, and bonds guaranteed by — you guessed it – the US Treasury. With the current flattish and the somewhat inverted yield curve, they only need to go out a year to maturity to go beyond 4%. They’re making a lot of free money by supporting it with your low-yielding checking account.

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If you’re unhappy with your bank rates, consider cutting out the middleman and purchasing the Treasury directly. They are not as liquid as a bank account, but despite having a set maturity date, they can be sold on the secondary market if you change your mind or need to access the cash. However, keep in mind that, while they will pay par at maturity, their prices may change till then.

The Money Market

The term “money market” refers to debt securities that are extremely liquid and have a short maturity date issued by governments or commercial organizations. Money market accounts are available from some banks, but they can also be obtained through mutual funds.

They typically yield less than the federal funds rate but more than a standard checking or savings account for your cash. Because of their credit rating and short maturity, they are priced in one-dollar increments and have very seldom fallen below. The majority, but not all, of the funds are insured by the FDIC or SIPC.

Conclusion

It may take some effort, but in this new era of high-interest rates, getting a reasonable yield on your cash is well worth it. Successful cash management is not as thrilling as picking the next hot stock or high-yielding asset, but its long-term impacts are significant.

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