By Mike LaViña, Private Wealth Advisor & Director of Socially Responsible Investing at Cornerstone Advisory
In 1987 the band “U2” released Running to Stand Still. The story goes that the title of the song came from the lead singer, Bono, asking his brother how his business was going, and he responded, “It’s like running to stand still.”
Managing cash is often just like that. Moving money around just to keep from losing to inflation. In March of 2022, the Federal Reserve made their first interest rate increase since the advent of the COVID-19 pandemic in 2020. This was the beginning of the current interest rate hiking cycle that has completely changed how savers should manage their cash. In this new environment, there are a few principles that we feel everyone should be aware of when managing their cash.
First, managing cashflow is at the heart of everyone’s financial reality. A core element of personal finance is maintaining an emergency cash reserve. This creates a “cash cushion” for unexpected expenses and is the first line of defense in avoiding unnecessary use of debt.
There continues to be a wide array of choices when it comes to managing cash. Savings accounts, high-yield savings accounts, money market funds, CD’s, T-Bills are just a few options. Here are a few principles to keep in mind when choosing the best investment vehicle:
- Savings accounts at banks have not kept up with other options for cash management. While these accounts offer FDIC insurance, their yields are typically lower today.
- High-yield savings accounts: These typically offer higher yields AND FDIC insurance up to $250,000. While the interest rates may not be as high as other investments, these accounts are considered low risk because of the associated backing of FDIC insurance.
- Money market funds: These are mutual funds and are not backed with FDIC insurance and are subject to market risk. They typically maintain a stable share price of one dollar and are considered a stable investment. These funds are also highly liquid, which means you can easily access your funds when you need them. In the current environment, the yields here are generally higher than in high-yield savings accounts.
- Certificates of Deposit (CDs): These are typically offered by banks and credit unions and typically pay a higher rate of interest than a savings account. However, CDs are generally not as liquid as Savings accounts, high-yield Savings accounts or money market funds. Savers generally agree to keep their money deposited at the institution for a fixed period. It is important to compare the yields on a CD to other options before you give up your liquidity. Conversely, if your goal is to lock in a specific rate of interest for a period of time this could be an effective investment for that goal.
Considering inflation is an important factor in cash management. If your savings vehicle is not keeping up with inflation over the long run, then the purchasing power of your cash is reduced. So, at the very least, the goal in cash management is to keep running with the pace of inflation.
Finally, the interest rate environment has changed abruptly in response to rising inflation. Finding an effective vehicle for cash management that meets your tolerance for risk, liquidity and savings goals has grown in importance over the past year.
As always, if you have any follow-up inquiries on this topic, please do not hesitate to contact us.
The Cornerstone Team
Disclosure: Cornerstone Advisory, LLC, is registered as an investment adviser with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment or strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals, and economic conditions may materially alter the performance of your portfolio.