Please Check The Interest Rate On Your Cash!
Welcome to Saving Money with Andrew!
With interest rates still at highly-elevated levels not seen in many readers’ adult lives (as of this post, the benchmark fed funds rate is just below 5.5% and the average 30-year mortgage rate is nearly 7.5%), it’s more important than ever to make sure that your cash is earning a decent rate of interest. If you have $10,000 in cash savings, for example, the difference between zero and 5% is a substantial $500/year.
Disappointingly, both our checking and savings accounts still pay well below 1%, so we’ve kept the majority of our cash in one of two places:
Bank CDs
For years, bank Certificates of Deposit (CDs), in which you leave money for a pre-determined period, made little sense. Rates were little higher than zero, and if you needed your money before the maturity of the CD, you’d have to pay a penalty.
But unlike checking/savings, banks have aggressively increased CD rates to compete for depositors’ cash. Check with your bank about their short-term CD options. And if they’re not offering a competitive rate (at least 5% or so), shop around. I occasionally check Bankrate (not an endorsement) for a sense of current CD rates. Make sure, of course, that the bank is FDIC insured. I’m generally willing to give up a small amount of interest for a brand name bank I’ve heard of.
Pros: Easy to do, still covered by FDIC insurance (up to the $250,000 cap)
Cons: Interest penalty for early withdrawal, rates may be slightly lower than other options.
Low-Fee Money Market Funds
If you need access to your money at any time, a money market fund may be a good option. Money market funds invest their money in highly-liquid, low-risk instruments (e.g., short-term US government bonds) meant to maintain the value of your investment. These funds typically pay competitive interest (e.g., at the time of this post, the Vanguard Federal Money Market Fund yielded approximately 5.25%) and can be sold anytime. Make sure your fund has a very low expense ratio—the Vanguard fund has an 0.11% expense ratio, and I certainly wouldn’t consider anything with an expense ratio higher than 0.25%.
Unlike bank accounts or CDs, money-market funds are not FDIC-insured. These funds are not zero risk, but in practice losses are extremely rare. This Wikipedia article offers a nuanced and seemingly-balanced discussion.
Pros: Liquidity whenever you need it
Cons: No FDIC insurance, extremely small (but non-zero) risk
Finally, while you’re at it, make sure that your cash in your brokerage/investment account is earning competitive interest as well. The default “cash sweep” options for many brokerages are still well below 1%. I wrote about this issue in 2019 in Don't Let Your Cash Get "Swept" Away, and in this new world of ~5% interest rates, low rates on your savings should be a thing of the past.
Just remember, as always, this newsletter is *not* investment advice!
And now, Andrew’s pick(s) of the week:
Several picks this week on some weighty (and less weighty) societal issues:
Zvi on College Admissions - a lengthy but informative post on the messed up college admissions environment
Matt Yglesias on Grade Inflation and College Life - grade inflation is extreme, and it seems like college kids today are earning near-straight A’s with far less effort than before.
The Comfortable Problem of Mid TV - “It’s got a great cast. It looks cinematic. It’s, um … fine. And it’s everywhere.”
Young Americans Are Getting Left Behind by Rising Home Prices, Higher Stocks - nice homes are increasingly out of reach of most young first-time homebuyers. A problem that’s easy to overlook.
Millions of American Kids Are Caregivers Now: ‘The Hardest Part Is That I’m Only 17’
I hope this has been helpful. If you liked it, please share it on social media! Also, please send me your feedback, requests, and success stories.