EARNING INTEREST ON YOUR CASH WITH CONNER HANLON, CFA?

Who doesn’t want to earn interest on their cash??Falcon Wealth Advisors?Portfolio Manager?Conner Hanlon, CFA?,?joined Cory on a recent episode of?Upticks?to discuss how people can put their money to work for them in this high interest rate environment. A summary of our conversation is below.

Cory:?Our conversation today?isn’t?going to focus on how investments can fuel your long-term financial plan, but rather how you can make money on idle cash in checking and savings accounts. Can you start us off by talking about how much interest rates have increased in the last year or so?

Conner:?Sure, Cory. The benchmark rate that most markets use is the Fed Funds Rate. It has increased from just under 1% last May to about 5% in May 2023. This is obviously a significant increase in just one year.

Cory:?And this has a number of consequences, both positive and negative. One positive outcome of higher interest rates is that savers who haven’t been able to earn much interest on their cash now can. It’s been years since we’ve been in an environment like this.

Clients often ask us why their banks aren’t paying them more interest on their savings while interest rates are high. Why is that?

Conner:?It would be welcome if they did, but banks make money on the gap between what they pay customers to keep their money at the bank and the rate at which they can lend or invest customer money.

Cory:?That’s important for people to understand—and higher interest rates could lead to fewer people wanting to borrow money from banks, which banks must also take into account. Lending is a significant source of revenue for banks.

As you alluded to, and as we’ve seen in recent months with banks like Silicon Valley Bank, higher interest rates can negatively impact banks who are invested in fixed income assets like?bonds. All of this affects how much interest banks pay customers, and it varies from institution to institution.

As we’ve talked about on Upticks, the Fed is indicating that most of the big interest rate increases are behind us. What are we expecting in the coming months?

Conner:?We’re seeing some differences of opinion. Many stock market investors believe we could see interests?cut?by September, though I think it’s a little soon to expect that. The Federal Reserve says not to expect any rate cuts this year. But both the Fed and the market appear ready to press pause on raising rates and let the data catch up to see the effects of recent increases.

Cory:?Regardless of where interest rates go from here, we know what they are right now. What are some things people with cash in their checking and savings accounts can do now to maximize the interest they’re earning on that money?

Conner:?One strategy they can pursue is to buy US Treasury securities. We’re seeing elevated yields of 4-5% on bonds with maturity dates ranging from one month through a couple years.

Cory:?Can you define what is a US Treasury security?

Conner:?Sure, it’s a bond backed by the full faith and credit of the United States government. A bond basically involves you loaning the government money and they pay you interest in return.

Cory:?From a security standpoint, how does leaving your money in a bank compare to investing it in a bond?

Conner:?All funds you have in a bank up to $250,000 are insured by the FDIC. That’s a key number. You don’t want to have more than $250,000 at a single financial institution.

But Treasury bonds have historically been safe investments too, as they’re backed by the government.

Cory:?Can you talk about what types of bonds we’re buying for?Falcon Wealth Advisors?clients and what people who have some cash on hand should consider?

Conner:?If you have some cash on hand that you may need in the not-too-distant future—for a tax payment or a down payment on a house, for example—you can still put that cash to work in the short term. We’re helping clients invest that money in some of those short term bonds we discussed. And we’re also helping clients lock in these attractive yields for the long term too, on 5-year and 10-year bonds.

Cory:?Yes, just as we diversify our clients’?stock portfolios, we diversify their bond portfolios as well. This is called laddering—owning bonds that expire at different times.

But on this episode we are mostly discussing bonds that mature in 3 months, 6 months, one year. A 3-month bond is currently yielding about 5 percent, despite yielding next to nothing not that long ago. If you want to take advantage of these short term yields, meet with your fiduciary wealth advisor to discuss how you can put your cash and other assets to work. And it’s important to meet with your advisor regularly, because if yields fall in the coming months, you may want to reevaluate your strategy. Of course, this is a process we lead for our clients at?Falcon Wealth Advisors. We’re regularly examining how we can use bonds to grow their portfolios in both the short and long term.

Conner:?Yes, while these short term bonds are currently attractive, we don’t want to put all our eggs in one basket and take more risk than is necessary.

Cory:?Are there any risks or drawbacks for people chasing higher interest rates?

Conner:?Yes, if you’re buying a bond from a company (and not the government), you may want to ask why it’s yielding so much. Is the company on solid financial footing? You shouldn’t simply go online and search bonds and sort by yield. A fiduciary wealth advisor like?Falcon Wealth Advisors?can help you choose the bonds that make the most sense for your financial plan. And as we’ve discussed, government bonds are lower risk than corporate bonds.

Cory:?With all of this in mind: If I have $50,000 in a bank account that I may need in the next year or two, but it’s earning little to no interest, what options should I consider?

Conner:?As we discussed, that 3-month Treasury bond is yielding about 5 percent currently. So even if you know you will need that money in six months, you can still put it to work for the next three and earn that attractive yield.

Cory:?Indeed. Now is the time to evaluate your cash on hand and have a conversation with your?fiduciary wealth advisor?about how you can maximize this environment.

What are some common misconceptions about interest rates that readers should be aware of?

Conner: Lots of people assume that a shorter-term bond pays less interest than a longer term bond. That’s often true, but sometimes it’s not. Right now we are seeing an inverted yield curve, meaning short-term bonds are paying higher yields than 5-year or 10-year bonds.

Cory:?Yes, in a more normal environment, those longer-term bonds will yield more interest. But this is not the first time we’ve seen an inverted yield curve. This is a unique opportunity we want to take advantage of, but we don’t want to be so shortsighted that we fail to ladder the bond portfolio.

Some other common and related myths: lower interest rates are good for borrowers and higher interest rates are good for savers. This isn’t necessarily the case, for a number of reasons.

Nor should we assume interest rates will remain constant. When something is going up, it’s easy to envision it continuing to, just as it’s easy to picture something continuing to go down as it falls. But we saw a low interest rate environment for many years and it all shifted pretty quickly.

Do you have any success stories you can share of clients who put their cash to work in this high rate environment?

Conner:?I just spoke with a client the other day who is paying off a construction project over a series of payments in the coming months. We set up a bond maturing schedule so this client could invest that money in short term bonds and earn interest on it.

Cory:?That makes good sense. I recently spoke with a client who had about $150,000 spread across a few bank accounts. This money wasn’t earning them much interest, so we helped the client invest in short term bonds that are earning about 5%.

And I do the same thing, by the way. I have to pay?taxes?quarterly, so I will invest that money I set aside in short-term bonds so that I can earn interest on it.

Thanks so much for joining me, Conner. If you want to meet with a fiduciary wealth advisor who will make a recommendation in your best interests about what you should do with your cash, please contact?Falcon Wealth Advisors?today. Now is the time to reevaluate your approach to cash and bonds. The more interest we can earn from bonds, the less heavy lifting stocks have to do for your financial plan. You can reach me directly at?[email protected].

Clients choose to work with us to enhance their financial literacy and explain exactly what?their?financial plan means to?them.

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