Is Cash Still King?

In other words, is cash still an attractive investment considering the current interest rate environment?

Several months ago, we wrote about the opportunities to earn more income from our cash investments as interest rates were increasing. 

The rise in interest rates has abated for now as the Federal Reserve no longer needs to keep raising interest rates given that inflation is trending down, and unemployment remains low.  While the Federal Reserve didn’t lower rates in January, the current expectation is that the Fed will begin lowering interest rates later in the year.

How much cash should I have?

How much cash to keep on the sidelines is a good question to ask ourselves, but there really is no “right” answer.  We always recommend keeping an emergency fund of about six months’ worth of expenses. Depending on your circumstances you may want to have a little more or less.  For a more detailed breakdown of establishing and maintaining your emergency fund check out this checklist. 

We rarely talk about how much is too much cash because it is a matter of personal preference and risk tolerance.  Cash is considered a low-risk asset.  Having an abundance of it provides comfort and security to some people.  The implicit risk with cash is that it won’t earn enough to keep up with inflation. So, your cash is in effect losing value if inflation is increasing the cost of goods and services, but you are not earning the rate of inflation on your cash.

Others are more risk tolerant and would prefer to have as much of their assets as possible invested in riskier assets like stocks and bonds.   We would never presume to tell someone what their risk tolerance should be.

If you are keeping more than six months of living expenses in cash, now is a great time to extend the length of time to earn more interest by purchasing or laddering CDs or Treasuries. 

What to do with cash now?

Cash Instruments

Typically, the higher yielding money market funds and CDs are the cash vehicles that provide you with the best interest rates on your cash.  The benefit of CDs in this interest rate environment is they allow you to lock in a higher rate for a longer period.  For instance, as of this writing, Marcus is paying 5.25% APY for a 12-month CD or 5.4% for a 14-month CD. It is important to note that breaking a CD early will incur a fine.  So, this might not be the best option for emergency funds that you may need to tap into on short notice.

High yield money market funds are a good option for emergency funds because you can access the funds at any time.  The downside is that when the Fed starts lowering interest rates, as we expect them to do in 2024, the yields on the money market funds will begin to decline as well.

Short-term bonds

US Treasuries are a good option for short term cash since they are very liquid to buy and sell as needed and come in all maturities.  One can easily purchase them through www.Treasury.gov or most brokerage firms.  A benefit of Treasuries is that the income received is exempt from state income tax. 

Laddering CDs or Treasuries

Another strategy to consider to ensure cash is readily available, and to take advantage of higher-yielding longer-maturity deposits like CDs or Treasuries, is a bond or CD ladder.

Laddering CDs or Treasuries is a strategy of buying a series of CDs and/or Treasuries with different maturities.  As the positions mature the owner will have the opportunity to “roll” the funds into another CD or Treasury that will reflect the interest rates at that time.

Whatever option you choose, please feel free to call Jenifer at Mosaicfi with any questions.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.

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