A friend of mine asked me recently what the difference is between a High Yield Savings Account (HYSA) and a regular ole savings account.
The answer is fairly simple: HYSAs tend to pay higher interest. However, this question implies another: What should I do with my cash?
Cash management has been a pretty hot topic recently. Over the past two years, we’ve seen the Federal Reserve raise interest rates from basically 0% to over 5%. As a result, for the first time in years, cash and other short-term investments are providing the opportunity for a non trivial return!
Why does this matter? It means that you can get your money to work harder for you. For instance, you may have $10,000 earning 0.40% right now that could potentially be earning 5.00% - the former provides $40 in one year, while the latter provides $500 in one year. What would you do with that $460?!
What’s the catch? You have to know how to take advantage, and yes, it does take a little bit of work.
Before we go further, I want to note that these strategies are best suited for money that is earmarked to be in cash. Generally, that means the amount of money you’ve determined you need for an emergency fund (check out my post about emergency funds here) plus any funds you plan to use for spending in the next 2-3 years. If your goal is further out than that, you may benefit from adding in some stocks and/or bonds; however, every situation is different, so you should consult your advisor to determine the mix that’s best for you.
Great! Now that that’s out of the way, let’s get into it!
There are three main places to look for cash management solutions - some are easy, others… not so much. Below is a list in order of what I figure is easiest to most difficult.
Banks and Credit Unions
Investment Accounts
US Treasury
Banks and Credit Unions
One benefit to using a bank or credit union is that your money may be FDIC or NCUA insured. If we’re talking about hundreds of thousands of dollars, you should review the limits of this insurance - otherwise, it’s enough to know it’s insured against loss.
Banks and credit unions often offer the ‘normal’ accounts that pay little to no interest. It’s important to know that banks and credit unions make money by using the money people deposit to lend out to borrowers at a higher rate. They’re incentivized to keep these ‘normal’ account rates low - if they can pay depositors less, they get to keep more of the interest they’re earning on the funds they’re lending out.
However, in order to prevent depositors from taking their money elsewhere, they often offer other accounts that pay more interest. This dynamic means that you can often find access to Money Market Accounts (MMAs), High Yield Savings Accounts (HYSAs), and Certificates of Deposit (CDs) at your bank or credit union, all of which tend to pay higher interest rates than regular savings accounts.
HYSAs and MMAs are often fairly accessible, but depending on the institution, they may have: minimum balances (i.e. you need $50k to open the account), maximum interest-bearing balances (i.e. you may have $20k in the account, but only $15k is earning that higher interest), and there may be withdrawal restrictions.
CDs may also have fees associated with them, and they typically have early withdrawal penalties. For this reason, I’m not a big fan of CDs for emergency funds, but they can be great for money you plan to use after a certain number of months or years.
Keep in mind that ALL interest rates and fees will vary depending on which institution you use. Credit unions tend to offer better rates because they’re not for profit (banks are), and online banks may offer better rates as well because they don’t have the cost of brick-and-mortar locations.
Investment Accounts
If you open an investment account (also known as a brokerage account), you can buy almost anything inside of it. In this case, you’d be buying Money Market Funds (MMFs). MMFs are similar to MMAs (see above - still talking about Money Market Accounts, not mixed martial arts). Both MMAs and MMFs invest in super short-term loans to the government and highly rated companies. MMFs are not FDIC or NCUA insured, and they can decrease in value, although it’s very uncommon. The fund company manages the MMF for a fee that reduces the interest rate you receive.
As of this writing, there are multiple MMFs paying an interest rate over a 5%. The main downside of these funds is that they can be kind of a pain to invest in. You have to open a brokerage account, send money from your bank to the brokerage account, then buy the fund in the desired dollar amount. They may also have minimums, transaction fees, and lockup periods, although you can find funds that don’t.
Common brokerages that people use for this purpose include Fidelity, Charles Schwab, and Vanguard. For the people I work with, I facilitate this process through my custodian, Altruist, which isn’t available if you’re not working with an advisor who uses Altruist.
US Treasury
Some people like to buy US treasury bills directly, which you can do by opening an account at treasurydirect.gov. You then need to fund it from your bank account and select which bills to buy. This can get surprisingly complicated, and you should only take this approach if you have plenty of time to learn the ropes and do additional research.
Additionally, although all US treasury bills are guaranteed by the US government, that doesn’t mean they can’t go down in value. The US government guarantees the interest rate you’ll earn from the date you purchase the bill to the date the government pays it back, so you shouldn’t be surprised if your initial investment goes down before it goes up.
Conclusion
There are all sorts of different ways to manage your cash, and it’s important to consider your options. I hope this post helps point you in the right direction, but if you’re still not sure what you should do, keep in mind that you can always reach out via my Contact page if you have questions about your situation.
As always, keep in mind that you don't have to go it alone. Check out my website to see what it's like to work with me and reach out if you have any questions.
If you found this post helpful, help spread the word! Share with friends and family that you think may benefit as well. But remember, this is solely for educational purposes - it's not advice.
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