CDs, or Certificates of Deposit, Treasuries, and TBills are paying higher interest than they have been in years. You can start earning 3-4% interest on money that is safe and guaranteed.
When we talk about parking cash, we think—what money might I need in the next 1-5 years. We want to make sure that it’s safe. In the past 10 years or so, there hasn’t been much variance between different types of safe investments.
With interest rates going up, there are opportunities to make more. Watch to find out about:
1. What to pay attention to money market accounts at your bank.
2. US Treasury bills. They are backed by the government. Currently, you can find them paying 3.5-4% interest rate for short term. These are guaranteed and backed by the government.
3. Using Schwab, Fidelity, etc. to buy CDs for higher return
4. Buying treasuries through Treasury Direct
Usually when things sound too good to be true, they are, but in this situation, make sure it’s FDIC insured or backed by the US government and your risk is small.
00:00 Welcome!
00:40 What does parking cash mean?
01:07 Your local bank
02:40 US Treasury Bills
04:20 CDs that make more
05:50 How to buy treasuries
06:39 Brokerage vs local bank
TRANSCRIPT:
Bridget: Where to park cash is an important topic with our viewers and there's been new developments in this area. And so that's what we're going to talk to you about today on Friends Talk Financial Planning. Hi, I'm Bridget Sullivan Mermel, and I have a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer, and I have a fee-only financial planning practice in Middleton, Wisconsin. And before we dig into where to park your cash reserves, I want to remind everybody to hit that subscribe button. Subscribing helps other people on YouTube find our content, so please hit subscribe. And I'm looking forward to talking about parking cash, Bridget.
Bridget: Yeah, so what we mean by this is we talk about savings accounts, then usually we like to have an emergency fund, but then we also want to address funds that you might need in the next one to five years and maybe even longer than that. You want these to be safe. So safety is important, but you'd also like to earn some interest on it. And again, there's been new developments, and I think it's an important thing to talk about. So, John, what's your first idea?
John: Yes. And I agree with our point exactly. When we have this money that we need to have on that safe side, it's just been sort of keep it in the bank: having money market accounts, having savings accounts, having checking accounts, CDs. And for years now, ten years or more, it hasn’t made much difference if it's in checking or money market or maybe CDs are paying a little bit more. But that safety feature was paramount, and there just wasn't much variance between those things. The difference between earning 0.1% and 0.3% just doesn't make very much difference.
And one of the things that we're seeing here in the last six or eight weeks is that with interest rates going up there are opportunities to do things that get a little bit more return while maintaining that safety. One thing we talk about is actually pay attention to what's going on at your bank or credit union. It used to be that your money in checking or savings was all sort of the same thing. Now we're seeing money market accounts, savings accounts paying 1% or 2% interest. That’s a heck of a lot better than 0.1%. So just paying attention to that is the first thing. If we have $50,000 in the bank, we're talking meaningful dollars.
And then there is a separate thing. Again, we're seeing the credit unions around here in the Madison area anyway, where money market accounts are 1.5% or 2% or slightly more than that, but US Treasury bills these days are paying even higher. And treasury bills are treasury bonds backed by the government, but they're short term so you buy them in four-week or eight-week increments—two months or three months or six months—and those treasury bills are paying 3.5% or 4% or even a little bit more interest, guaranteed, backed by the government, totally safe and not locking your money up for five years.
We're talking a month or two months or six months sort of thing so for clients where we have money in savings and checking or savings and money market or maybe that you had a CD at your bank this is something that we think people should be looking at and similar sort of thought process short term and some really appealing rates. I know that you guys are talking about similar things to folks in your practice, right?
Bridget: Yeah. We've been talking about it. We use CDs a lot. I've been in the industry since 2008 and generally CD rates have been higher than Treasuries and so we've just been doing CDs and we use those for the first five years as bond ladder, but now Treasuries have caught up or are maybe even a little bit higher in some circumstances, so they're definitely worth taking a look, when it used to be something we haven't even looked at all until over the five year mark. So, Treasuries are awesome.
Also, I just wanted to say that we usually recommend that people move their CD money to their investment account, and then we have custody at Schwab, and we buy clients’ CDs through Schwab. I'm sure Fidelity has the same thing that you can buy CDs through them, and they aggregate them and so you get some good deals on CDs, and I've found them to be almost always better than the local banks, so that's a really great place to look. One other tip I use is that we try to have everybody—for the most part unless there's some reason not to—have their CDs mature at the same time. We have them mature usually in November, so then we can say, “Okay. Everybody's CDs are maturing in November.”
It helps if it's not at a weird time. There's a reason why the local banks they say 15 months or 13 months. It's because you're usually not acclimated to say, “Okay. I want to move my money.” People don't remember that. And they're trying to have you keep the money there, and I don't begrudge them that at all, but if you use Schwab you can say, “What date do I want to have it mature on?” So that's what we do and treasury bills are definitely worth a look. Okay, so say you want to buy treasury bills. What are your options? They do sell them through the Schwab platform, but there's another option as well, so why don't you talk to us about that?
John: Yeah, we do talk to people about buying Treasuries. There was one summer four or five years ago where we had a little bit of a blip like this and just like buying I bonds you can go right to treasurydirect.gov and set up an account there and buy the Treasuries directly from the government, so if you don’t have a brokerage account or if you're not working with an adviser, you can just do it directly through there as well. And the system is relatively easy to deal with so you have options. It's not like you have to go through a brokerage firm or you have to go through an advisor.
I really appreciate you sharing the idea that buying CDs from a brokerage firm gives you a lot more options than local banks. We've got a lot of folks here it's just a comfort thing for the most part, saying, “I go to the bank. It's familiar. I can’t quite touch it, but it’s pretty close to that compared to it being on my computer someplace.” These are the types of conversations that you and I have, and we have with some of our colleagues at ACP. We often talk about how we need to make sure that for our clients—and I'm also getting a takeaway from this—look at those brokerage firm CDs. Part of the difficulty is that some of those brokerage firm CDs are from banks that we've never heard of.
Bridget: Right.
John: You feel like it's almost imaginary or like asking, “What's going on here?” But it's all FDIC insured. It's not like you're just fly by night operations.
Bridget: Right. It’s FDIC insured, and you're not getting over the FDIC insured amount, so you're not taking a risk here.
John: One of the things in thinking about something like ABC Bank from West Virginia or wherever it is you go, “Who are these guys again?” FDIC insured—we've got the backing. It is safe from that standpoint. Just this whole discussion in general, though, it seems hard to believe. When you hear things like get double the interest rate, which is what we're talking about around here in the Madison area where we're seeing one- and two-year CD rates at 2%, 2.5%, or 3%, you go, “Wait a minute. It sounds too good to be true.” Usually when something sounds too good to be true, your radar detector should go up and should you ask, “What's the catch here?”
This is one of the few things where there isn't a catch. It's like an anomaly. There's something going on here, and we can take advantage. And it is backed by the government. There’re no hidden expenses or catches or things. This is one of the few places where this is the case. Most of the time it's like, “Yeah, you can't beat the system.” Trying to be too smart is usually not a recipe for success. This is a place where there're some opportunities if you're aware of things and taking advantage of them, that are sort of like a free money type of a thing if you’re paying attention to it.
Bridget: Yeah, it's awesome. And my favorite bank actually that we've gotten CDs from before was BMW Bank.
John: Is that right?
Bridget: Is that the bank of BMWs? They've got operations in the US obviously, so they can have a bank here and issue CDs. That's what they do. So it seems like this is a great place to wrap it up, John. I am Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer, and I've got a fee-only financial planning practice in Middleton, Wisconsin. Both Bridget and I are members of the Alliance of Comprehensive Planners. If you like what you hear on our show, reach out to us directly, or if you want to find an adviser in your area, check out acplanners.org.
Bridget: And please subscribe.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.