How to Manage Your Cash with Higher Fed Rates

At Falcon Wealth Advisors, we’re passionate about helping clients seize opportunities in all types of market environments. With the Federal Reserve raising interest rates again in late July in their fight against inflation, many investors are wondering how they can put their money to work. I recently joined Jake Falcon, CRPC? on Upticks to discuss what people with significant amounts of cash in savings accounts should consider. Be sure to tune in to the full episode either via podcast or YouTube to hear our entire conversation

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Jake: The Fed recently raised its Fed Funds Rate by a quarter of a percent, bringing interest rates to a 22-year high. These high rates punish borrowers, so it’s understandable if someone looking to buy a home or car isn’t excited by this news. But if you’re a saver like most Falcon Wealth Advisors clients, it’s a tremendous opportunity to earn money on your cash. In fact, bonds are now yielding higher interest than the current rate of inflation. If your savings account isn’t paying you at least 4% interest, we don’t think it’s prudent to park more than 6 months worth of living expenses in that account unless you have some other goal in mind.

What are some investment opportunities you should consider if you have more cash in your savings account than you could need in the short term? The first opportunity we’ll discuss is a certificate of deposit (CD). We haven’t talked much about CDs in recent years, but they’re typically issued by banks and are insured by the FDIC up to the $250,000 limit. CDs are currently paying around 4 percent and while many people think of their bank when they talk about CDs, we’re able to purchase them for clients at Falcon Wealth Advisors.

What are the downsides of a CD? If you cash out of them early, you likely will have to pay a penalty. And sometimes a bank will automatically purchase a new CD for you when an older one matures, regardless of if that was your intention. But if you have a good banking relationship, you can hopefully avoid this. If you don’t want to move money between institutions and want to leave money at your bank, CDs present an opportunity to earn more interest than a savings account. And you can ladder CD maturity dates—if you have, say, $100,000 to invest in CDs, you could invest that money in CDs that mature at different times. This will protect you if interest rates fall.

Cory: I joke with clients that I’ve been waiting for higher interest rates my whole career. Everyone said they were coming for many years, and they’re finally here, bringing investment opportunities like CDs to the foreground.

Jake: And if you don’t want to purchase a CD through your bank or want to explore different yields, as I mentioned, we can indeed purchase CDs for clients. You can email [email protected] to set up a meeting with our team and learn more.

What’s another way people can invest their hard-earned cash, Cory?

Cory: Treasury bonds issued by the U.S. Treasury are yielding significantly more interest than in recent years. We like the security and safety of these bonds, as they’re issued directly from the government.

Jake: Yes, we consider these to be an even safer investment than a CD, because the odds of your bank failing are higher than the government failing to pay bondholders.

Another benefit of Treasury bonds is there isn’t a fee associated with selling one early—while the values of these bonds fluctuate, you’re not locked in if you need to access the money you’ve invested. Again, we’re talking about money you could potentially need in the short term. Money for the longer term will often be invested in higher growth-oriented vehicles like stocks, though this ratio depends on your age and if you’re working or retired.

Our key message today: if you’re sitting on some cash in a savings account, there are short-term investment vehicles you can take advantage of to put that money to work and earn some interest. We help clients buy US Treasury bonds every day and we ladder their maturities, just as we talked about with CDs.

Regular readers know about I-Bonds, which are also government bonds. They were paying around 9% last year, but because inflation has cooled, I-Bonds are now paying a little over 4%. Yields on I-Bonds reset every six months, so someone who purchased one when they were yielding 9% are now earning about 4% interest. Because there are rigid rules associated with cashing out I-Bonds, we believe purchasing Treasury bonds or CDs will make more sense for most Falcon Wealth Advisors clients.

With that said, if you own an I-Bond, it may be time to sell it—assuming you’ve owned it for at least a year, which is one of those rules. Even if you have to sacrifice a little bit of the bond’s yield because you haven’t held onto it for five years, it still may be worth selling, as you could earn more from other investments, including the ones we’ve discussed today. As fiduciary wealth advisors who are required to act in your best interests, we are happy to sit down with anyone and explore if they should sell or hold their I-Bonds. Email [email protected] to set up an appointment with our team.

What’s the next investment opportunity we’ll discuss?

Cory: Corporate bonds also offer the opportunity to earn interest on your cash. Companies issue bonds, similarly to how the government issues Treasury bonds. They can be an appealing investment in this interest rate environment and can yield a bit more interest than Treasury bonds. This is because there is more risk associated with them, as they aren’t backed by the government.

Jake: If you have some cash you may or may not need in the not-distant future, but want to earn a little more interest than what a Treasury bond offers, corporate bonds could be a prudent investment.

We also help clients buy municipal bonds, which are issued by local governments. What’s great about them is they may be tax free—investors potentially don’t have to pay any taxes on the bonds at the local, state or federal level. You wouldn’t want to buy a municipal bond in a traditional or Roth IRA, but they could make sense for investors in higher tax brackets. We have tools to crunch the numbers and determine if a municipal bond is right for you.

Cory: It’s important to work with a fiduciary wealth advisor who understands the bond landscape. I wouldn’t encourage anyone to pick their own corporate or municipal bonds, for example, as there are risks associated with those investments.

Jake: Indeed, you don’t want to go at this alone or work with someone who isn’t acting as a fiduciary on all your investments. We strongly believe in working with a fiduciary wealth advisor if you want to buy bonds.

The final investment we will discuss are stocks. If you have a large emergency fund that has built up, and there are funds in it you don’t anticipate needing in the next five years, it may be worth investing them in stocks so that you can aim to maximize growth.

If you do think you will potentially need some of that emergency fund in the next 18 months, we think you should feel good about being able to earn at least 4% on the bonds we’ve discussed today. Again, bonds are more favorable to investors than they have been in many years. We’re continuing to help clients invest in them and ladder when they mature, as this offers flexibility and diversification.

Of course, investment decisions vary from person to person and depend on your financial plan. But if you have money sitting in a savings account that isn’t keeping up with inflation, let’s talk. Please contact Falcon Wealth Advisors at [email protected]. And you can reach us directly at [email protected] and [email protected].

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

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.