Banking / Financial

Alternative Investments for Short-term Funds

Your Wealth

The Federal Funds Rate, which is set by members of the Federal Open Market Committee (FOMC), is the rate at which banks and credit unions lend reserve balances to other banks and credit unions overnight.

This rate is a benchmark upon which banks set all other short-term interest rates. Despite the Federal Funds Rate rising over the past few years from virtually 0% during the financial crisis to the current 2.5% (all interest rates herein are as of this writing), bank interest rates have not kept up, leaving many investors and business owners frustrated with near 0% interest rates on their checking and savings accounts. This can be especially frustrating for investors and business owners who may be holding cash reserves in anticipation of an upcoming expense, or even just reserve funds for a rainy day. When considering inflation, cash is often realizing negative rates of return for investors. There are alternatives that should be considered by investors for their short-term funds.

Higher-Yield Savings Accounts: The bank around the corner may be convenient, but it may not be worthwhile! Sure, changing your checking account would be a hassle, but it is relatively easy to open (and fund) a savings account with an online bank. It is relatively easy to find an online bank with interest rates near 2.2%.

Money Markets: Some banks and most brokerage firms offer investors access to a (or several) money market fund(s). Money market fund interest rates vary by institution, but can yield more than a savings account (and some can even focus on tax-free interest from municipal securities). Money market funds offered at your local bank are FDIC insured (up to applicable limits), while those offered by brokerage firms are generally not.

Treasury Bills: Treasury bills are backed by the US Treasury Department and sold in varying maturities of up to one year. The interest earned on treasury bills is Federally taxable, but is exempt from state and local income tax. Treasury bills are a very liquid market and currently yielding more than savings accounts and money markets at approximately 2.4%.

Short-Term Bonds: For investors who have cash on the sidelines for a rainy day, short-term bonds in highly rated investment grade bonds could deliver yields that are higher than savings accounts, money markets, and treasury bills. There are mutual funds, exchange traded funds (ETF’s), and even individual bonds that can be invested in with the goal of delivering upwards of 3% in yield to investors. When considering short-term bonds, investors need to closely consider the credit rating of issuers and the size and liquidity of the bond issues so that if the bonds are not able to be held to maturity, there is a level of comfort that they could be sold in the marketplace.

About the Author: Steven Gelber, AIF®, is an Associate Wealth Advisor with Financial Principles, LLC, a HighTower wealth management practice.

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