After more than a decade of record low and near-zero interest rates, cash is king once again.
When thefederal funds rate increases, it affects the interest rates of banking products.
Federal Reserve Chairman Jerome Powell has indicated that interest rates will likely continue climbing.
Interested in CDs? Check out thebest CD ratesto see how much you can earn.
Probably not as good as youd like.
It always seems like an uphill battle to build (and keep) a decent amount in savings.
But what if your car breaks down, or you have a sudden medical bill?
Ask one of these companies to help…
But simply keeping your cash in a traditional savings or checking account wont do you much good.
Interest rates at traditional banks remain low.
By cash, we mean conservative investments and interest-earning bank products.
Heres how they work.
High-Yield Savings Accounts
Ahigh-yield savings accountis an interest-earning account mostly offered by online banks and credit unions.
The national average yield for savings accounts was0.37%on March 20, 2023, according to the FDIC.
You likely wont find high-yield savings accounts with attractive rates at brick-and-mortar banks.
Typically, the longer the duration, the higher the interest rate.
CDs are also FDIC insured, just like checking and savings accounts.
One way to offset some of this risk is practicing bond laddering.
This staggered approach gives you some flexibility in responding to a shifting interest rate environment.
These accounts share many similarities with high-yield savings accounts.
For the average consumer, theyre pretty interchangeable.
The only major differences?
The minimum deposit and minimum balance requirements may be lower with similar rates.
Theyre typically sold by brokerage firms and mutual fund companies.
The returns are often on par with CD interest rates.
One advantage: Its a liquid investment, which means you might cash out at any time.
But because they arent FDIC insured, they can technically lose principal, though theyre considered very safe.
Unless the federal government defaults on its debt for the first time in history, investors get paid.
T-bill yields are higher than theyve been in over a decade.
you’re free to buy T-bills and other treasuries straight from the U.S. government through theTreasuryDirectwebsite.
Historically, the stock market has outperformed other investment types long-term.
Stocks might be struggling today, and may be volatile over the next year or two.
However, stocks have a remarkable track record of outperforming the total return of cash-related investments over time.
In other words, relying too heavily on cash can make it harder to reach your long-term financial goals.
When you sell a stock, youre crystallizing those losses or gains, Bohne said.
When Is Cash Beneficial?
This can reduce the need for retirees to liquidate their investments when markets are down, Edmisten said.
Think buying a house, purchasing a car or paying for a wedding.
Pros and Cons of Cash-Related Investments
So when does cash make sense?
And when are you better off investing your money elsewhere?
Keep these things in mind as you explore cash-related investments.
Savings accounts and money market accounts, in particular, let you withdraw funds without penalty.
This means cash is king for investors who need quick access to their money in case of an emergency.
Many cash investments also offer predictable returns, in contrast to the volatile nature of stocks.
Pro: Interest Rates Keep Going Up
Rising interest rates are good news for savers.
It means theAPYon your high-yield savings account will likely enjoy regular rate bumps for the near future.
If a recession hits, stock prices will likely plunge for a spell.
No one wants that.
The job market also usually takes a hit during a financial crisis.
Interest rates are rising because inflation is high.
And high inflation erodes the value of cash over time.
Your spending power is still decreasing over time.
Its a good reminder to be very thoughtful about how much cash you hold, Melia said.
But in reality, its impossible to predict exactly when the market will crash and rebound.
The Bottom Line
Cash is looking better than it has in years.
Experts generally recommend keeping a cash emergency fund and allocating about 5% of your investment portfolio to cash.
But depending on your age, risk tolerance and financial goals, a bigger cash allocation can make sense.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer at The Penny Hoarder.
She focuses on investing, retirement, taxes and life insurance.
(Can you sense my millennial sarcasm there?)
You know which ones were talking about: rent, utilities, cell phone bill, insurance, groceries…
