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Are You Taking Advantage of Higher Interest Rates with Your Cash?

When most folks think of a wealth management firm, they think of a company that helps clients manage a portfolio often consisting of stocks, bonds, and other investments. This approach aims to help them achieve their long-term goals such as retirement. Stocks and bonds have historically far outperformed cash over the long term, making these investments appropriate for goals further out in the future.

Meanwhile, clients are often saving for short- to intermediate-term goals. Investing in stocks and bonds would be inappropriate due to their volatile nature. For near-term goals, cash or cash equivalent investments are often appropriate. A holistic financial plan discusses near-term cash reserves as well as a longer-term portfolio.

As a rule of thumb, we typically recommend having a cash reserve, or emergency fund, of three to six months’ worth of living expenses. One to two months’ worth of living expenses should be kept in a checking account for everyday expenses. The remaining months’ worth could be kept in a highly liquid interest-bearing account, such as a savings account. Those savings are reserved for the nice little “surprises” that tend to creep up at the worst times, such as having to repair a car or replace an air conditioning unit.

For the past several years it didn’t matter where you held your cash earmarked for short to intermediate goals. It was difficult to find any account yielding over a few fractions of one percent in a safe, short-term solution. Savings accounts, CDs, money markets, and other short-term vehicles for cash offered little, if any, interest. However, that has rapidly changed.

The Federal Reserve has aggressively raised rates over the past thirteen months. While that has been one of the primary reasons for market volatility, the upside is better rates for savers. If you are earning less than 4% on your intermediate-term emergency savings, we have options at BCS Wealth Management that may help you do better.

Through our custodian, Charles Schwab, we have access to cash management vehicles such as brokered CDs and money market funds. Schwab’s inventory of CDs allows us to shop rates from across the country and gives us the opportunity to spread larger amounts across several banks ensuring we stay within FDIC limits. Short-term FDIC-insured CDs could be found paying over 5%[1] as of March 27, 2023.

We also have access to several money market funds currently yielding up to around 4.5%[2] as of the same date. While money market funds are not protected by FDIC insurance, they are protected by SIPC coverage. SIPC safeguards investors from assets going missing (not declining in value) in the event of a brokerage firm’s failure. Money market funds can technically dip in value. However, a fluctuation in value is extremely rare. In general, money market funds are designed to provide stability and a market-based interest rate.

If you are holding any cash in excess of your cash reserves in low interest-bearing accounts, we have access to better options for you. Feel free to reach out to us and we would be happy to have a discussion on how we can help you best manage the cash allocated for your more near-term goals.

[1] Rates on most CDs are expressed as APY, or the annual percentage yield, and is accurate as of March 27, 2023. Rates are subject to change. Fees may reduce the earnings on your account. There is no penalty for early withdrawal, however, early withdrawal requires selling on the secondary market which may be selling at a discount to your original purchase price. Different account types have different restrictions, therefore, stated rates may not be available to you depending on your specific situation. CDs are typically sold in $1,000 increments with a $1,000 minimum. Please note, BCS Wealth Management has a $100,000 account minimum for cash and cash equivalent accounts (accounts investing only in cash, money market funds, CDs, and/or Treasuries). Contact us for more information. 

[2] All Schwab Money Funds with the exception of Schwab Variable Share Price Money Fund seek to preserve the value of your investment at $1.00 per share, but cannot guarantee they will do so. Different account types have different restrictions, therefore, stated rates may not be available to you depending on your specific situation. Please note, BCS Wealth Management has a $100,000 account minimum for cash and cash equivalent accounts (accounts investing only in cash, money market funds, CDs, and/or Treasuries). Contact us for more information. 

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