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The Federal Reserve on Wednesday declined to raise interest rates further, but after months of aggressive increases, one thing remains certain among investors: the return of cash.
With interest rates hovering near zero for most of the past decade, savers could not expect to earn much interest when they stored their money. But with prices approaching 22-year highs, there may be a reason to get your bills out of the way.
Online banks offer high-yield savings accounts that pay interest in the range of 5%, According to Bankrate. Prices for one-year certificates of deposit – the equivalent of common cash – Pay up to 5.67%.
All of this might make you wonder: Should my portfolio include some green stuff?
Yes and no, says Amy Arnott, a strategist at Morningstar Research Services. “I think a lot of people might be tempted to load up on cash, but there’s still a very significant opportunity cost in terms of long-term growth,” she says. “Rather than loading up, people should consider using cash appropriately, for emergency funds and short-term spending goals.”
As an investment, cash has some advantages over things like stocks and bonds.
First, it is more liquid than anything else you can own. You can use your money to buy goods and services. If you want to buy something with anything else, you’ll probably have to convert it to cash first.
On the other hand, its value does not decrease. Although the dollar is no longer tied to physical assets, such as gold, it is backed by the full faith and credit of the United States government. This means that your $5 bill will be worth $5 as long as you have it.
But there’s a reason you shouldn’t keep bills in a safe place: inflation, which gradually erodes the purchasing power of your dollar. That’s why it’s generally recommended to put your money in a vehicle that maintains liquidity and security, but also gives you a chance to keep up with inflation.
At today’s rates, you may actually be able to do better than that.
“The returns are definitely more attractive and rewarding than they have been in a long time,” Arnott says. “You are actually getting ahead of inflation as long as inflation continues to moderate.”
Different cash equivalents come with different levels of liquidity, safety and return potential. Here’s a look at some popular options.
1. High-yield savings accounts
High-yield savings accounts and money market accounts, up to $250,000, are insured by the Federal Deposit Insurance Corporation. These offer the most liquidity this side of carrying cash in your wallet, and currently pay interest rates between 4.50% and 5%.
2. Certificates of deposit
Certificates of deposit — commonly referred to as CDs — are accounts offered by banks and credit unions that come with higher returns than savings accounts, but have a term that ranges from three months to five years.
When the term expires, you can get your money back, plus interest at the rate you locked in when you opened the account. Take out the money before the term expires, and you will face an early withdrawal penalty. Banks set their own terms for these penalties, but they are often 90 or 180 days of interest.
These are also FDIC insured, and currently come with yields of up to 5.67% for a one-year CD, According to Bankrate.
3. Money market funds
Money market funds are mutual funds that invest in short-term, low-risk debt. They can be purchased through your brokerage account or directly from a mutual fund company. There is very little risk of losing money with these funds, and they generally pay attractive interest rates and can be liquidated quickly.
Issues provided by Vanguard, JP Morgan and Charles Schwab They all pay more than 5.2% interest.
Like CDs, Treasury bills come in different maturities, from one month to 30 years. Treasury securities, like cash, are backed by the full faith and credit of the United States government, which has never defaulted on its debts.
You can buy these bonds directly from the Treasury Department’s website or from your brokerage firm, but you will have to sell them to raise funds in case you need money to spend.
The 4-month Treasury bill yield is currently 5.61%.
How much money to keep and which car to use depends on your personal situation.
As a rule of thumb, financial advisors generally recommend keeping three to six months of living expenses in an easily accessible cash account. By keeping your emergency fund in cash, you avoid the risk of having to sell other assets you own, such as stocks, at a potential loss when something happens.
“Recessions are usually when people tend to lose their jobs, and it’s also the worst time to try to sell stocks to raise money to live off of,” says Sam Stovall, chief investment strategist at CFRA. “Having some cash on the sidelines at all times is wise.”
Arnott says money market mutual funds and high-yield savings accounts offer liquidity and competitive returns for those looking to build an emergency fund. “There’s also the convenience factor, as you can easily move assets to different accounts.”
Cash is also a way to achieve short-term goals, such as saving for a wedding or a down payment on a house. If you have a good idea of when you need the money, it’s not a bad idea to match the time frame to the maturity date on Treasuries or CDs, especially since many financial experts believe the Fed may hold off on raising interest rates or even lower them – SUBMIT Low prices across the board.
“You can get an interest rate of 3.4% on a CD and lock it in for 10 years. That’s pretty good,” Stovall says. “You only lose if inflation continues to rise.”
If inflation picks back up, the Fed could keep raising interest rates, but “I think the risk of that happening now is very low,” Arnott says.
As for your long-term money, you’ll probably be better off in assets, such as stocks, that fluctuate more than cash, but tend to deliver higher returns over time. This is because although cash looks attractive now, it has historically done a poor job of keeping up with inflation.
“If you’re looking at, say, your 401(k) portfolio or your retirement portfolio, I don’t think it makes sense to keep any type of cash in that type of account,” Arnott says.
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