Ray Dalio is one of the most closely followed investors on the planet, and he poked the bear back in 2020 when he said that “cash is trash.” His point was that savings accounts, certificates of deposits (CDs), money market funds, and most other options to park cash paid no yield.
This week, he changed his tune1. Now that the Federal Reserve has raised interest rates to levels unseen since before the Global Financial Crisis (GFC), and volatility has wreaked havoc on riskier asset classes, cash is back. But rising interest rates don’t mean big banks are anxious to pay you more for your deposits. In fact, the chart below shows that yields on many FDIC-insured savings accounts have barely moved this year2.
The good news is that there are other options. To start, visit Bankrate.com3 for a list of higher-yielding accounts that vary based on lockup and deposit amounts. Right now, several banks offer almost 3% with the same FDIC insurance as big banks (up to $250,000). How is this possible?
Deposit rates are based on supply and demand, and since the Fed flooded big banks with so much cash in response to the GFC and lockdowns in 2020, these banks have trillions in excess reserves. This is a massive supply of cash sitting in vaults, so the last thing they need is more deposits.
But not all banks are sitting on piles of cash. It’s mostly just those deemed “too big to fail.” Smaller banks still need to compete for deposits, and they do so by offering higher yields.
The second option is a cash management solution like Flourish Cash because…
- It pays well above the national average and regularly resets (this is good when rates are rising).
- It’s 100% liquid versus a CD that usually locks up your cash.
- FDIC insurance is materially higher - up to $1.25m for an individual account, $2.5m for a joint account, and $1m for a business account.
- It takes minutes to set up an account, and moving cash is a click of a button.
- It integrates with our reporting tools so clients can get a more holistic view.
The table below shows the current rates, which have risen consistently since April.
The third option is annuities. Most annuities are sold as 7+ year income vehicles that can include riders and other features, but there are more simplistic products that compete with short-term CDs. The table below lists current rates from one popular provider4.
One unique advantage to annuities is that taxes are also deferred - even in non-qualified accounts. At the end of the contract, you can usually keep the cash in at whatever rate is offered then, and tax remains deferred. Transfer to another annuity, and you can still defer the tax. Or pay the tax and be done.
The fourth option is money market funds. These are usually liquid, offer attractive yields, and tend to respond quickly to interest rate hikes. But after the financial crisis, these funds reduced fees to ensure that investors did not lose money in an era of rock-bottom interest rates. Now, when rates rise, so do fees. Hence, focus on the net return to ensure the yield is truly competitive.
The fifth option is U.S. Treasury bills and bonds. Buying a 1-year Treasury bond yields 4.15% versus 0.39% to start the year5. In fact, we haven’t seen a risk-free return like this on a two-year lockup since 2007.
The bottom line
Earning a higher return almost always requires taking on more risk. But the relationship between risk and return is not always linear thanks to FDIC insurance. This presents an opportunity for investors willing to do something about it, but the sad reality is that most won’t.
According to a study published in 2021, when presented with a better return from switching to a higher-yielding account, only 3.5% of consumers made the change6. The main reason why most consumers didn’t is the belief that switching would be a huge hassle. The study also found that customers overestimate how much of a hassle it is and underestimate how much their interest rate might increase.
Let’s do the math. Assume $100,000 in cash at 0.01% at a big bank versus 2.5% at Flourish (both offer daily liquidity, so it’s a more straightforward comparison than a CD, annuity, or Treasury). The bank pays $10 annually, and Flourish would pay $2,500 if their deposit rate remained where it’s at today (being conservative here by assuming the Fed is done hiking rates).
This is free money. It’s like finding a stack of twenty-five $100 bills on the ground. And it’s not like the old days when opening a new account meant driving to the bank, waiting in line, and leaving hours later with a hand cramp from signing countless forms. Setting up a Flourish account and an online bank account takes a few minutes, and moving money in and out can be done on an iPhone. Financial advisors do 99% of the work to open annuity accounts that are often processed in just one day. It's an entirely different ballgame.
So, which option is right for you? It’s hard to say because each offers unique features. If you don’t care about locking up your capital, annuities and CDs may be the right choice to capture that extra yield. If you value liquidity, then Flourish or an online savings account may be the best bet. Higher FDIC insurance from Flourish may be the right call for cash balances above $250,000. Annuities may be the right call if you want to avoid taxes for as long as possible. Or perhaps a blended approach makes the most sense.
But don’t let all these options overwhelm you, either. That’s why you hired a financial advisor, and they can help devise a plan to manage your cash.
The bottom line is that cash is no longer trash. Sure, it may not beat inflation anytime soon, but something is better than nothing.
5 Bloomberg. As of 10/4/2022
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.