More Bang for Your Buck: Higher Levels of Interest Outside of the Big Banks

Wes Moss

It’s time to talk about the real problem with banks. No, not the recent collapse and calamity of Silicon Valley and Signature Banks, respectively. Thanks to the actions of the Federal Reserve to protect all depositors, it’s doubtful that very many of us should feel adverse effects from that situation. I’m referring to the real problem: banks don’t want to pay up for the privilege of holding your money.

According to?Bankrate, the national average savings rate sat at less than 0.25 percent as of April 19, 2023. In contrast, 1 Year U.S. Treasury Bonds were at?approximately 4.75 percent.?For those without a calculator, that’s almost 20x the return for U.S. Treasury bonds, which are typically just as safe as typical savings accounts.

There are a few reasons for this mismatch. First, the big banks are, to some extent, relying on the perception that they are the “safest” place for people to put their money. Like the prettiest girl in school or beachfront homes in California, they’re in demand. They can get away with paying lower returns. Second, when the Fed raised interest rates, it hamstrung the ability of some financial institutions to issue home loans, a steady source of income of the banks. Lastly, some banks made the mistake of purchasing long-term, low-yield bonds before interest rates increased (for example, it caused trouble for Silicon Valley Bank). It’s tough for them to pay you 4 percent interest when their money is tied up and earning much less.

Though it’s particularly galling under the current circumstances, the recalcitrance of banks to pony up higher interest rates on your deposits is anything but a new phenomenon. It’s been true for so long that most of us fell asleep to the lullabying status quo. But now we’re awake, alert, and aware, asking ourselves if there anything we can do. Yes, there is, and it’s already happening.

It’s taken about a year, but we are finally seeing money leaving commercial deposits and entering money market funds.?The numbers are staggering. In about a month, money market funds ballooned to over $5.2 trillion.

The FDIC does not guarantee money market funds, but that doesn’t necessarily make them a risky alternative. As Ryan Ely, a Senior Investment Advisor at Capital Investment Advisors, said on a recent episode of my?Money Matters?radio show, “A lot of money markets are just U.S. Treasury money markets that are full of short-term U.S. Treasuries, which are highly liquid and, by and large, the safest investment available to anyone.”

In terms of risk vs. reward, these can be attractive and easy to purchase. Most people have a money market option in their 401(k)s. It probably didn’t pay much before, but now it might land somewhere between 4 to 4.5 percent.

For those who want to pass on a money market fund, a good ol’ fashioned short-term U.S. Treasury bond is another option. Any big brokerage firm should be able to purchase you one, and they are undoubtedly valuable assets for many folks.

Finally, it might behoove investors to search for a certificate of deposit (CD) or savings accounts at financial institutions paying higher yields. In the current higher interest rate environment, they are more common than we have seen in the past decade. All Federal Deposit Insurance Corporation (FDIC-insured) banks and National Credit Union Administration (NCUA-insured) credit unions cover deposits up to $250,000. You don’t need to solely rely on the big banks for this type of safety.??

The bottom line is that we have entered a period of higher interest rates, and we now have some additional options to earn more interest on that cash.?Sure, keeping some maintenance cash in the bank is still a good idea.?However, the excess cash you may not need for everyday use could be earning more in a money market fund, a U.S. Treasury, or high yield CD or savings account.?

Investing in equities remains an important part of preparing for and living through retirement.?

However, now that interest rates increased dramatically, other high-earning safety assets like U.S. Treasury bonds and money markets exist to keep the conservative portion of your portfolio earning higher levels of interest than we have seen in quite some time.

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This?information is provided to you as a resource for informational purposes only and?is not to be?viewed as investment advice or recommendations. Investing involves risk, including the possible?loss of principal. There is no guarantee offered that?investment?return, yield, or?performance will?be achieved.?There will be periods of performance fluctuations, including periods of negative?returns?and periods where dividends will not be paid.?Past performance is not indicative of future?results when considering?any investment vehicle. This information is being presented without?consideration of the investment objectives, risk tolerance, or financial circumstances of any?specific investor and might not be suitable for all investors.?There are many aspects and criteria?that must be examined and considered before investing.?Investment decisions should not be made?solely based on information contained in this article.?This information is not intended to, and?should not, form a primary basis for any investment decision?that you may make. Always consult?your own legal, tax, or investment advisor before making any investment/tax/estate/financial?planning considerations or decisions.?The information contained in the article is strictly an opinion?and it is not known whether the strategies will be successful.?The views and opinions expressed?are for educational purposes only as of the date of production/writing and may change without?notice at any time based on numerous factors, such as market or other conditions,

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New On?Retire Sooner Podcast?

Today on Retire Sooner, Wes Moss dives into the Buffett mindset of sticking to your principles in long-term investing decisions and looking toward economic growth. In doing so, he discusses one investing planning strategy that could be essential to the journey of retiring sooner: investing in companies versus stocks. Taking Federal Reserve forecasts for 2023 into consideration, many companies can still survive, thrive, and have great returns. The episode concludes with the inspiration that having even a bit of the Buffett mindset may help you retire sooner than you think! Click below to listen now!

Team Highlight

We recently asked our team to send us photos of their furry friends, here's what Investment Associate Miller Majors had to say about his furry friend Murphy.

“While Murphy has been my?fiancée’s?dog since he was a little Golden Lab pup, I came into his life when he was a five-year-old, and we’ve had non-stop adventures ever since.?

After putting in five long years (or thirty-five in dog years!) into his emotional support career, Murphy has since retired to a life of leisure. However, as a poster child for the HDOB (Happiest Doggo On The Block) movement, he remains active in his core pursuits. These include impatiently waiting for his kibbles, two-mile walks through Piedmont Park and Morningside with mandatory stops at the neighborhood good boy biscuit box, afternoon snoozes, emptying his toy bin, the occasional zoomie, and watching golf with his dad on TV (Murphy is obsessed with the Hawaiian swing!). Murphy also keeps his family and a close-knit group of friends nearby, as his best friends Addie, Tilly, and Bleecker are all within walking distance or a short drive.

Between all of his core pursuits and social activities, Murphy has achieved a sense of fulfillment at nine years old that we should all aspire to.”

Click here?to read more about the pets of capital!

At Capital Investment Advisors (CIA), we strive to help clients reach their goals by focusing on our specialty: Income Investing. We are a fee-only financial advisory and portfolio management firm headquartered in Atlanta with offices in Tampa, Denver, Phoenix and throughout the United States. Our advisors in Georgia, Florida, Colorado, and Arizona provide clients with a full range of financial advice. Since 1996, CIA has been providing financial strategy and management tailored to the client’s individual circumstances and objectives.

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