It’s time to talk about the real problem with banks. No, not the recent collapse and calamity of Silicon Valley and Signature Banks, respectively. Thanks to the actions of the Federal Reserve to protect all depositors, it’s doubtful that very many of us should feel adverse effects from that situation. I’m referring to the real problem: banks don’t want to pay up for the privilege of holding your money.
According to Bankrate, the national average savings rate sat at less than 0.25 percent as of April 19, 2023. In contrast, 1 Year U.S. Treasury Bonds were at approximately 4.75 percent. For those without a calculator, that’s almost 20x the return for U.S. Treasury bonds, which are typically just as safe as typical savings accounts.
There are a few reasons for this mismatch. First, the big banks are, to some extent, relying on the perception that they are the “safest” place for people to put their money. Like the prettiest girl in school or beachfront homes in California, they’re in demand. They can get away with paying lower returns. Second, when the Fed raised interest rates, it hamstrung the ability of some financial institutions to issue home loans, a steady source of income of the banks. Lastly, some banks made the mistake of purchasing long-term, low-yield bonds before interest rates increased (for example, it caused trouble for Silicon Valley Bank). It’s tough for them to pay you 4 percent interest when their money is tied up and earning much less.
Though it’s particularly galling under the current circumstances, the recalcitrance of banks to pony up higher interest rates on your deposits is anything but a new phenomenon. It’s been true for so long that most of us fell asleep to the lullabying status quo. But now we’re awake, alert, and aware, asking ourselves if there anything we can do. Yes, there is, and it’s already happening.
It’s taken about a year, but we are finally seeing money leaving commercial deposits and entering money market funds. The numbers are staggering. In about a month, money market funds ballooned to over $5.2 trillion.
The FDIC does not guarantee money market funds, but that doesn’t necessarily make them a risky alternative. As Ryan Ely, a Senior Investment Advisor at Capital Investment Advisors, said on a recent episode of my Money Matters radio show, “A lot of money markets are just U.S. Treasury money markets that are full of short-term U.S. Treasuries, which are highly liquid and, by and large, the safest investment available to anyone.”
In terms of risk vs. reward, these can be attractive and easy to purchase. Most people have a money market option in their 401(k)s. It probably didn’t pay much before, but now it might land somewhere between 4 to 4.5 percent.
For those who want to pass on a money market fund, a good ol’ fashioned short-term U.S. Treasury bond is another option. Any big brokerage firm should be able to purchase you one, and they are undoubtedly valuable assets for many folks.
Finally, it might behoove investors to search for a certificate of deposit (CD) or savings accounts at financial institutions paying higher yields. In the current higher interest rate environment, they are more common than we have seen in the past decade. All Federal Deposit Insurance Corporation (FDIC-insured) banks and National Credit Union Administration (NCUA-insured) credit unions cover deposits up to $250,000. You don’t need to solely rely on the big banks for this type of safety.
The bottom line is that we have entered a period of higher interest rates, and we now have some additional options to earn more interest on that cash. Sure, keeping some maintenance cash in the bank is still a good idea. However, the excess cash you may not need for everyday use could be earning more in a money market fund, a U.S. Treasury, or high yield CD or savings account.
Investing in equities remains an important part of preparing for and living through retirement.
However, now that interest rates increased dramatically, other high-earning safety assets like U.S. Treasury bonds and money markets exist to keep the conservative portion of your portfolio earning higher levels of interest than we have seen in quite some time.
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