Your friendly BFS Advisory Group team has been nerding out on interest rates, and you should too.
Over the last year, the Federal Reserve has raised the Fed Funds rate from 0% to the current target of 4.75-5.00%. There are plenty of headlines about what that rapid increase has done to the housing market, the stock and bond markets, and now the banking sector. But the big headline that seems to have been missed is how individuals can benefit from higher rates on their cash.
The long-term average of the Fed Funds rate is 4.6%, but we haven’t seen rates anywhere close to that in so long that many people don’t even remember what it’s like to manage their cash. During the first stage of my career in the early 2000s, the Fed Funds rate was over 3% for years at a time. Back then, I commonly recommended that clients keep their conservative dollars at the bank, in a combination of savings, money markets, and CDs depending on when they planned to use the money. Funds being used for monthly expenses vs. cash reserves vs. a holding account for a pending large purchase all have different answers when it comes to cash management, and we helped our clients to build risk stacks at the bank as part of the foundation of their asset base.
Jump to 2008 when the Fed lowered rates to 0% after the financial crisis – and kept them there for many years - and those options went away. Savers had to choose between safety and return on their money, as most Americans got used to making next to nothing on their money at the bank. With no good options to turn to, many people – correctly – stopped thinking about it.
That time, thankfully, is over for now, and savers once again have the opportunity to make money on their money without unnecessary risk. Consider these hypothetical but fairly representative numbers:
2021: $100,000 X 0.25% rate = $250 annual return
2023: $100,000 X 4.5% rate = $4,500 annual return
Even prior to the recent bank failures, banks have been surprisingly silent on the options available to their customers to increase the interest they are receiving on their accounts. I recently contacted one of the large national banks where I hold a cash account to discuss how to increase the return on my savings. I was surprised to find out that I had to make an appointment, discuss my options (I could only choose between two maturity dates), and finalize details with a banker (who was thankful that I knew the answer about how often I want the interest to compound because she didn’t), and then wait as she printed a paper (yes, paper!) CD for me to take home.
It’s been quite different in our office. We have been nerding out on the options we have available to manage our clients’ cash and designing a risk stack that makes sense for them. Using a combination of savings, money markets, and CDs, we have been able to increase the return on their cash significantly as rates have increased. With our access to CDs from banks across the country, we can match the rate, maturity date, and qualities of the CD to our clients’ needs. We then buy the CD digitally for our clients through our trading desk and track them through to maturity to discuss the next steps for those funds – whether used for a withdrawal, renewed in a new CD, or reinvested in the broader portfolio.
CDs do have a maturity period (typically 3-12 months, but can be significantly longer), so they are not appropriate for all cash balances. We are also starting to see new CD rates inch down as the Fed has indicated it will stop raising rates soon. Nonetheless, rates on many types of fixed options – from savings to money markets and even fixed annuities – are higher than they have been in nearly 15 years. If your cash is still earning the same rates as you did in 2021, you might want to call your banker or advisor to explore your options.
BFS Advisory Group is a boutique wealth management firm in Dallas. Our mission is to help our clients to use their money to have the lives they want. Our team creates financial plans for individuals and families and designs investment, tax, cash management, and legacy plans to achieve those goals. If you need guidance on your financial plan, email us at hello@bfsadvisorygroup.com.