Help Maximize Returns: A Comprehensive Guide to Savings and Short-Term Investments

SARAH SWAN, CFP®, VICE PRESIDENT, WEALTH MANAGER​

Over the last couple of years, a very commonly asked question we hear from clients or regularly address in our financial planning process with individuals is what to do with savings in this environment of higher short-term interest rates. It’s a good question, and one that hadn’t been particularly relevant in the decade prior, marked by near-zero interest rates. It’s relevant now and continues to be relevant.

Flip clock moving

Generally speaking, for money that shouldn’t be invested in the stock or bond market due to a shorter time horizon for liquidity needs and therefore very low risk tolerance, there are several options worth considering for ensuring that your cash is earning something while it sits in reserve. The options, of course, come with different pros and cons and varying stipulations surrounding lock up periods or ease of access, minimum or maximum investment thresholds, yield expectations, and tax treatment, so it’s important that all factors are considered in deciding what makes the most sense for your individual circumstances.

Let’s dive into some of the options below, which I’ve arranged in order of liquidity, or the ease of converting the investment or asset into cash to be used: 

High-Yield Savings

A high-yield savings account is a type of bank savings account that can pay 10-12 times what a standard savings account pays in interest on deposits. 

People tend to have a savings account at the same institution where they have a checking account, but some online banks have offered exceptionally high savings account interest rates, which has significantly changed the high-yield savings landscape.

As a result, not all traditional brick-and-mortar banks that tend to serve a wide range of banking needs offer high-yield savings accounts. One can open a high-yield savings account at a different bank (or banks) from where other banking is done.

Traditionally, savings accounts are meant for emergency funds or earmarked accounts for larger short-term expenses or purchases such as a house down-payment in which it’s critical to protect principal. 

High-yield savings accounts are covered by FDIC (banks) or NCUA (credit unions) insurance up to $250,000 per account in the event the bank itself fails.

Of all the options covered, this is the most liquid and least restrictive. Withdrawals can typically happen anytime, fairly instantaneously, although banks can have their own policies about withdrawal restrictions, despite 2020 legislation that eliminated a limit of six withdrawals per month from savings accounts. 

Unlike CD rates (explained next), which are locked for a set term, savings account yields tend to be variable, which means they are subject to change anytime without prior notice. They tend to adjust with monetary policy, or the Federal Reserve’s changes to interest rates.

Certain accounts may indicate that the currently advertised interest rate is applicable only for an introductory period, and there might be minimum or maximum balance requirements to qualify for the advertised rate. 

Banks may charge fees on savings accounts, so it’s important to understand them or how to avoid them, such as by keeping a certain minimum balance. 

Interest earned is subject to both federal and state income taxes.

Many high-yield savings accounts offer an annual percentage yield (APY) of over 4% as of April 2024, and some are as high as 5.25%, but those may require higher minimum deposits.

Money Market Funds

Money market funds are mutual funds that invest in a range of short-term, low-risk securities such as Treasury bills, CDs, and commercial paper. They pay dividends that generally reflect short-term interest rates and are therefore subject to interest rate fluctuations on a regular basis. Many investors use money market funds to store cash in the short term, or as a safer alternative to investing in the stock or bond markets.

(Note: a money market fund is not the same as a money market account. A money market fund is an investment that is sponsored by an investment company, and it doesn’t technically guarantee its principal, whereas a money market account is a type of interest-earning savings account offered by a bank and therefore insured by the FDIC.)

While money market funds are not insured by the FDIC, they are regulated and subject to strict investment guidelines by the Securities and Exchange Commission and are considered extremely low risk. They do have Securities Investor Protection Corp. (SIPC) protection, which insures against the loss of cash and securities up to $500,000 if a brokerage fails, not if the investments themselves decline. 

They tend to be very liquid; investors can buy and sell them as needed with ease when cash needs arise.

They aim to maintain a stable net asset value (NAV) of $1 per share—they therefore do not fluctuate in value, making them suitable for investors seeking to preserve capital and earn a modest return. This requirement forces the fund managers to make regular payments to investors, providing a regular flow of income to them. 

Similar to CDs, returns from money market funds are generally higher than traditional savings accounts but lower than stocks or long-term bonds. 

They may be subject to underlying fees and expenses, typically ranging from around 0.10% to 0.50%. This should be noted when assessing a stated yield—whether it’s gross or net of underlying fees.

Money market fund dividends are subject to both federal and state income taxes, just like other income from investments. However, some states may offer state tax breaks or exemptions for certain types of investment income if the money market funds’ underlying investments are U.S. government debt.

Money market fund yields are often stated as a 7-day yield, which is a method of estimating the return of money market instruments on an annual basis by taking the difference between the price today and the price seven days ago and multiplying that by the annualization factor. Average 7-day yields on Schwab money market funds are currently ranging from 4.8-5.4% gross (before fees).

Certificates of Deposit (CDs)

CDs are time deposits offered by banks and credit unions, and they are FDIC-insured up to the maximum allowed by law, making them a relatively safe investment.

They have fixed terms ranging from a few months to five years, and some have a minimum deposit amount.

CDs typically offer higher interest rates compared to savings accounts, with rates varying based on the term and amount deposited, but unlike savings accounts, they don’t allow access to your money until the term ends without facing a penalty.

Early withdrawal from a CD may incur penalties ranging from several months to a year’s worth of interest.

CDs have guaranteed returns, so if you open a CD when interest rates are high, you can enjoy that rate even if banks drop rates on savings accounts and newly issued CDs.

When a CD matures, there’s a grace period of about a week in which you can withdraw funds. After that period, many CDs automatically renew for the same or similar term they had previously, but the rate will likely be based on the rate for new CDs of that term, not your CD’s original rate. 

CD interest is subject to both federal and state income taxes. However, some states may offer tax breaks for certain types of CDs or for interest earned up to a certain threshold.

Annual percentage yield (APY) as of April 1, 2024, ranges from about 4.8-5.25% on a 1-year CD.

Treasury Bills (T-Bills)

T-Bills are short-term debt obligations issued by the U.S. government, and they are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.

T-bills have maturities ranging from a few days up to 52 weeks, or one year, and they’re usually sold in denominations of $1000, with $100 being the minimum investment in a T-bill.

They do not pay interest payments leading up to maturity. Instead, they are sold at a discount to face or par value and mature at par value, with the difference representing the investor’s return—i.e. these are zero-coupon in nature; the return is purely based on price appreciation between the time of purchase and maturity. When the bill matures, if the face value amount exceeds the price the investor purchased it for, the difference is the interest earned for the investor. Ex. If you purchase a T-bill for $940 and it matures at its par value of $1000, your return at maturity is $60.

Many factors influence the prices of T-bills, and therefore, the returns they provide, including: the Fed’s monetary policy, investors’ risk tolerance and therefore demand for Treasuries, inflation expectations, etc. 

T-bills can be bought and sold on secondary markets, not just directly from TreasuryDirect, so while most investors typically hold T-bills until maturity, you are allowed to sell the T-bill on the secondary market before its maturity to realize a short-term gain or loss, depending on its price, if you need to cash it out.

Interest earned on T-bills is exempt from state and local income taxes but subject to federal income tax.

The yield as of April 1, 2024 on a 1-year T-bill was 5.07%.

By aligning your savings with the right short-term investment vehicles, you can help maximize returns while mitigating risk. Explore the options outlined above and tailor your strategy to fit your individual financial goals in 2024 and beyond.

Disclosures: This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements. Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Any information provided by H&R regarding historical market performance is for illustrative and education purposes only. Clients or prospective clients should not assume that their performance will equal or exceed historical market results and/or averages. The material listed in this communication is current as of the date noted, and is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Results will vary, and no suggestion is made about how any specific solution or strategy performed in reality.    An investment approach cannot guarantee a profit. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/ or principal.  Investors should consider their personal risk tolerance when making investment decisions. 

Sarah Swan

As a Wealth Manager and CERTIFIED FINANCIAL PLANNER™, Sarah focuses her time on working with clients and is passionate about helping them achieve their financial goals

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