No one liked the impact of the Fed raising rates so dramatically over 2022 and how those rate increases resulted in both the stock and bond markets seeing significant declines.  But one bright lining is on the cash side. You now can readily find interest rates in the 4-5% range which had not been seen for a very long time. 

You now have a decision. Do you keep your excess cash in an online savings account and earn 4% or more, keep it in a money market mutual fund for 5% or more, lock it up in a CD or Treasury Bill/Bond, or invest more into bonds or stock funds? We know one answer is not to keep excess funds in a bank account earning zero or close to it.

Savings accounts and money market mutual funds have reinvestment risk. What this means is yes today you may be getting 4-5% but what will be the rate tomorrow or six months from now? This is a risk you take. The rate could be higher or lower. I wish we had a crystal ball that worked but unfortunately, an accurate one does not exist. 

By looking at what banks and the US Treasury are offering for their products you can see that rates are higher in the short term than the long term. Expectations are that the rate increases have slowed down and may stop and could actually decline in the future. If that is your expectation also, then you may want to look at locking some of your funds up into CDs or Treasury Bills/Bonds.  In the old days, we would talk about CD/Bond ladders, where you might invest some money in a 6-month instrument, some in a 1 year, some in a 2 year, and so forth. This might make sense for you as you could tie it in with your expected cash needs. Or you may just want to lock in for 2-3 years in expectation of lower rates in the future and no need for the funds expected.

Bond funds are another option. Many investors frown on bond funds as rates have been so low in the past 10 years that bond returns were dismal. Add in the significant decline in bond values in 2022 which resulted from the unusual 5% raise in Fed Fund rates in one year. Looking from 1989 on, CDs often earned less than bonds in the 12 months after the Federal Reserve stopped raising rates. And bond funds typically gain in value when interest rates are cut.

What is best for you? It all depends upon your risk level and your cash flow needs. CDs and Treasuries are pretty straightforward so these may be the best for less experienced investors or ones with less risk tolerance. Bond funds may be good for those with more investment experience and longer-term investment periods.

Call or email one of us at Family First Financial Planning and we can help you determine what is right for you and your excess cash.

Leslie Trowbridge, CFP®

Family First Financial Planning

Hourly fee financial planner located in Cornelia, Georgia, serving clients throughout Georgia. Helping clients through fiduciary, objective, advice about retirement, investments, estate planning, college, and more. When you need a financial hand to hold, contact me at 772-781-7648. Main office is in Florida, but I cover Georgia.

Photo by Giorgio Trovato on Unsplash