Rising interest rates and a trio of regional bank failures have accelerated the movement of cash to higher-yielding alternatives, particularly money market funds. How to increase your own performance.
Tthe movement of funds from traditional bank accounts began slowly in the spring of 2022 after the Federal Reserve belatedly began its fight against pandemic inflation by raising interest rates. That accelerated dramatically last March when Silicon Valley Bank became the first of the big three regional banks to fail this year. In total over the past 13 months, a staggering1 trillion dollars in depositshas left the commercial banking system.
No, despite the lightning-fast bank run that brought down SVB, depositors have not gone into mass panic. They don't take money out of the banking system to put it in their mattresses: USA. commercial banks still have $17.15 trillion in deposits. Instead, the bank's customers have become aware that, without much extra effort or risk, they can earn 3% or 4% or even 5% interest per year on the cash they have left in their accounts. traditional bank checking and savings. earning little or nothing. nothing.
"The opportunity cost of interest-free checking accounts didn't really matter two years ago, whereas now you leave a decent return and cash flow on the table by not moving cash around and being really opportunistic and considerate about it," he says Margaret Wright, managing director and senior wealth advisor at Truist Wealth in Atlanta. "We've all been hungry for achievements," he adds. "All of a sudden you see these percentages and people are excited."
For some Millennials and Gen Zers, the idea that they can earn a cash return probably comes as a surprise. The Federal Reserve lowered interest rates during the 2008 recession, kept them low through 2015, and raised them modestly through 2019. Then, when the Covid-19 pandemic hit in early 2020, the Federal Reserve lowered interest rates again. practically zero interest. So for 14 years, there wasn't much of a penalty for leaving cash that you weren't ready to invest long-term in FDIC-insured deposit accounts.
"There is certainly excitement among the Millennial generation that they can now start earning interest on their cash."
"In my adult life, I haven't seen a scenario where you can really make a lot of money with your cash," says Julia Colantuono, a 31-year-old woman. Certified Financial Planner operating his own practice in Westborough, Massachusetts. "I remember my dad saying 'oh, put your money in the bank and it will work for you.' But that had never been true in my adult life until now.”
J. D. Power reports that 29% of bank customers surveyed in February and March said they had withdrawn deposits from their primary banking institution in the past 90 days. The under-40s were the freest, with 38% reporting moving an average of 43% of their deposits. In contrast, only 23% of customers over 40 had moved money and only 35% of their deposits had been moved.
"Millennials are definitely excited because now they can start earning interest on their cash," says Jonathan Kiehl, a 40-year-old CFP who runs his own financial planning firm in Lancaster, Pennsylvania. "Some of these people have had tens of thousands sitting in cash accounts that have not earned anything for the last few years."
Since March 2022, the Fed has raised its target for the "fed funds" rate (the overnight lending rate between US banks) 10 times from a range between 0% and 0.25% toa range of 5% to 5.25%. This is the highest level since September 2007 and the fastest increase sinceFed Chairman Paul Volcker fought inflation in 1980.
All but 0.25% of that 5% percentage point gain came before the March 10 bankruptcy of Silicon Valley Bank. Still, the riveting drama, complete with a run on Twitter, focused public attention on the reality that money can move quickly and easily, and that bank deposits above $250,000 are guaranteed by the Federal Deposit Insurance Corp. is not necessarily free of risk. .
The big winner from that wake-up call? Money market funds. In the six weeks following the SVB bankruptcy, Moody's reports, commercial bank deposits fell by $399 billion, while money market funds' assets rose by $342 billion. "It really saw a dramatic shift after bank failures started and people, both retail and institutional, smartly returned to money market fund products," said Neal Epstein, a senior credit officer at Moody's. "It's a combination of safety and performance."
According to the FDIC,from mid-April, banks paid an average annual interest of 0.06% on interest-bearing checking accounts (many checking accounts pay no interest at all); 0.39% on traditional savings accounts; and 0.57% on money market savings accounts. In contrast, the 100 largest money market funds now pay out an average of4,83 %according to Crane Data.
Money market funds hold high-quality, short-term debt, including U.S. Treasuries, federal agency notes, municipal debt, repurchase agreements and commercial paper. (What they have varies depending on the type of money market fund.)
There are also other ways that those with extra money in the bank can earn higher interest. They can invest directly in short-term government debt: Three-month Treasury bills now yield 5.2%, and the interest is not subject to government income tax. Or they can search online for FDIC-insured high-yield savings accounts and bank certificates.
Getting more out of spare cash can be as simple as a few taps on your phone: last month,Apple announced that it would partner with Goldman Sachsto offer Apple credit card holders a savings account that pays 4.15% annual percentage rate of return. In the first four days, the account attractednearly $1 billion in deposits. Goldman's seven-year-old consumer brand, Marcus, currently pays the same 4.15% APY to savers who enroll in itsaccount only online directly. (As of the third quarter of 2022, Marcus occupied110 billion dollarsin consumer deposits.)
When considering where to move your spare cash, liquidity is an important consideration. Both high-yield bank savings accounts and money market funds allow you to withdraw your money whenever you want without penalty, while CDs and T-bills and bonds are long-term investments. (If you need your money early, you could take a financial hit.)
"If you need cash in the next few days, I'd say look at a high-interest savings account or even money market funds. If you're okay with leaving the money there, you might want to look at a CD or Treasury bills."
"The most important thing to figure out first is what are you using this money for? Is it day-to-day cash that I might need to withdraw tomorrow? Or is it a fixed part of an emergency fund that one has not intended to touch for the foreseeable future," says Colantuono. "If you need cash in the next few days, I'd say look into a high-interest savings account or even money market funds. If you're okay with leaving the money there, you might want to look at a CD or T-bills."
Remember that the money market fund's return fluctuates with the short-term interest rates. If the economy goes into recession and the Federal Reserve lowers its target federal funds rate, returns on funds will also fall. Long-term investments (such as owning government bonds or individual CDs) offer the opportunity to lock in today's high interest rates.
"Given that long-term interest rates look as good as they've been in a decade, I say don't forget to look for long-term investment opportunities, safe investment opportunities, like bonds, to lock in that kind of return. so you don't miss that opportunity if the pendulum swings the other way,” says James Osborn, founder of Connecticut-based Envest Asset Management.
Tempted to move some cash? Here is a guide to your options.
MONEY MARKET FUNDS
Unlike high-interest bank savings accounts, money market funds are not FDIC insured. And as recent months have shown, nothing is completely predictable or without risk. Sure enough, the big depositors with more than $250,000 in SVB and in Signature Bank (which went bankrupt two days later) got all their money back. But that's because federal regulators concluded that forcing depositors to accept losses would resulta systemic risk. In other words, it can trigger a full-blown run and banking crisis. (However, the FDIC has not committed to covering all deposits over $250,000 in all cases.)
Money market funds, although not insured, have an excellent safety record. But in the anything-goes category, investors may worry if, for example, Washington's standoff over raising the nation's debt ceiling could have a sudden and unpredictable impact on funds.
If tight-fisted investors suddenly rush to withdraw their cash from a mutual fund, that fund may have to sell underlying government bonds ahead of their maturity date to meet withdrawal requests, perhaps selling them at a loss. Such scenarios raise concerns that money market funds could lose the ability to pay investors dollar for dollar, known in the industry as "breaking the money." Money market financiers are not legally required to intervene if the net value of their funds falls below $1, but the big fund companies have every incentive to ensure that investors do not lose money on a fund that investors assumed was safe.
"Big funds like Fidelity or Vanguard, if they ever broke the money, that would be the end of their business, period," says Dan Wiener, who has followed Vanguard funds for decades and is president of Adviser Investments. "No one would want to work with them, no one would want to invest with them. People would take their money out so fast it would make your head spin." Vanguard alone has waived $316 million in fees over the past 15 years to keep returns on its money market funds above zero, according to Wiener.
Money market funds aimed at ordinary investors come in several varieties: some invest in US Treasuries; some also have debts from public authorities; some have municipal debt (interest is exempt from federal and state taxes if you live in the state where the debt originated); some (known as core funds) have primarily commercial debt. (This is not as clear-cut as it may seem. For example, funds that identify themselves as Treasury funds may have repurchase agreements backed by U.S. Treasuries, as well as cash and Treasuries. Interest that they earn from repos, as opposed to interest, is not exempt from state taxes).
The top money market managers are big names: the top five are Fidelity, JP Morgan Chase, Vanguard, Blackrock and Goldman Sachs, according to Crane. So the fund you use may depend on where you keep your other investments and the type of fund you're comfortable with (a master fund may yield more but is considered riskier than one that sticks to government debt).
Please note that brokers and mutual fund companies that offer money market funds are generally members of the Securities Investor Protection Corp. SIPC does not protect you against losses in any particular investment or mutual fund. But if a broker goes under, an individual investor is covered for up to $500,000 in losses.
SAVINGS ACCOUNTS WITH HIGH RETURNS
Assuming the bank where you have your primary checking account doesn't pay interest, you can open an FDIC-insured high-interest savings account directly online at a specific bank (like Marcus) or indirectly through a fintech. : Typical fintechs. are not banks themselves, but instead send their money to a banking partner.
Fintech pioneer Betterment, for example, offers (through its banking partners) a “cash reserve” account thatcurrently paying 4.5%and is FDIC insured for up to $2 million (or $4 million for a joint account). A growing number of fintechs are offering more than $250,000 in FDIC insurance by spreading your money between different banks. That is because$250,000 FDIC insurance limitit is used separately for each depositor in each bank. (If you already have a large amount in one of the banks participating in the fintech program, make sure you don't accidentally exceed $250,000 in any bank.)
Even Robinhood, best known for trading individual stocks commission-free, has gotten in on the high-cost savings account law: customers who set up a $5-a-month savings accountrobinhood goldaccount, you can have uninvested cash swept into an FDIC-insured savings account currently paying 4.65% through a list ofaffiliated bankswhich includes Goldman Sachs, Citibank and Wells Fargo. According to Robinhood, its current insurance of up to $1.5 million will increase to $2 million after June 1 as more banks join the program.
Even Fidelity, the leader in money market funds, offers a banking option. Fidelity's FDIC-insured deposit sweep program will distribute available cash from brokerage clients to up to 27 different banks, including Citibank and Goldman Sachs, to maximize insurance. But your current FDIC insured sweeping accountbeta kun 2,60% APY; alternatively, you can keep your extra money in Fidelity's public money market (uninsured)with a streamyield of 4.73%.
In addition to the fee, you need to be aware of how easy it is to get to your money. Some high-interest money market bank accounts allow you to access your cash via a debit card or checks. At Marcus, on the other hand, you must first transfer the money you want to use to your checking account; Although the transfer is easy to complete online, you will need to wait a few days for the funds to be available in your checking account.
Another option for those looking for both performance and FDIC insurance:MaxMiInterésThat will help him spread up to $5 million into accounts that he says now pay an average of 5.10%. For that service he charges 0.04% per quarter, which equates to $40 per quarter for every $100,000 in a MaxMyInterest account. (There is a minimum fee of $20 every 3 months).
If you don't need a lot of cash for a period of time, you can lock in a decent return with an FDIC-insured deposit. An easy way to buy competitive CD prices is to use an investment account to buy brokerage CDs. The idea is that you hold them until maturity, but you can sell them sooner if necessary. (If interest rates rise, sales will be reduced.)
At the end of last week, Vanguard customers could e.g. buy CDs for three months to five years with an APY of about 5%. Institutions offering these rates range from Bank of China New York (three months, 5.15% APY) to Morgan Stanley Bank N.A. (two-year 4.9%) and a five-year 5% CD from BMO Harris Bank. Look, especially with longer maturities, for an indication that the CD is "callable," meaning that if interest rates fall, the bank can redeem the CD by a certain date, potentially canceling the point at which you indicates a high interest rate. along. The five-year-old BMO Harris CD? It will be published in November next year.
You can also search online for the highest CD pricesi forbes advisorand similar websites; These are not usually offered by the major banks, but they are all FDIC insured.
You can buy Treasury bills with terms from four to 52 weeks directly from the federal government by creating an account atTesoroDirecto.gov. (Although it's a clunky site compared to trade deals, you'll need a TreasuryDirect account if you want to buy Uncle Sam.)Bonos I, which is a long-term hedge against inflation).
Treasury bills don't actually send you an interest payment. instead of youbuy them at a discount to face valueand then collect the face value at maturity: the discount is your interest. You can order notes worth as little as $100 at TreasuryDirect. You are technically buying through an auction process. But when you buy through TreasuryDirect, you're actually accepting itaccept any rate set at an auction– in other words, you are not making a competitive offer.
You can also buy government bonds through your bank or broker. Fintech Public.com offers a Treasury account with an ongoing yield of 5.1% and a feature that automatically reinvests customers' T-bills at maturity. The account is offered through a partnership with SIPC member Jiko Securities.
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