Over the last decade investors and savers have grown accustom to low yields on cash and cash equivalent investments. Miniscule returns on cash has forced many investors to reach for yield and step into riskier asset classes to maintain the value of their money (keep pace with and/or exceed inflation) and get more attractive returns.
Recent History On Interest Rates
Between December 2008 and December 2015 the Fed Funds Target Rate remained in a range of 0.00%-0.25%. Since then The Federal Reserve has raised its target rate 8 times to the current range of 2.00%-2.25%, pushing up the shorter end of the yield curve. With the 3 month treasury yield currently at 2.42%, surpassing the S&P500 yield of 1.82%, yields on cash make it a real alternative again.
Investment / Savings Options
One great option for getting a good yield on your cash is online banks, which offer much better yields than traditional brick and mortar banks. An online bank that I really like and use is Ally Financial. Ally has an online savings account that currently yields 2.00% and has no minimums, no monthly maintenance fees, has 24/7 customer support, and is FDIC insured. Also, its online and mobile platforms are extremely easy and intuitive to use and provide a great customer experience.
Another great option Robinhood, which disrupted Wall Street with zero-fee stock transactions, announced last week that it will be also taking on banks. The company is going to begin offering checking and savings accounts in January 2019 that will yield 3.00%, the highest rate currently offered in the market. The accounts have no fees or account minimums, provide access to over 75,000 free ATMs, have 24/7 customer support, come with a debit card, and are SIPC insured.
A third option is high yielding money market funds. Two money market funds that I really like are Vanguard Federal Money Market Fund (VMFXX) and Vanguard Treasury Money Market Fund (VUSXX). Both funds currently have a 7 day SEC yield of 2.22% and expense ratios of 0.11% and 0.09% respectively. Vanguard Federal Money Market Fund is comprised of 52% U.S. Treasuries, 30% U.S. government obligations, and 18% repurchase agreements, has a weighted average maturity of 57 days, and has no minimum investment amount. Vanguard Treasury Money Market Fund is comprised of 100% U.S. Treasuries, has a weighted average maturity of 56 days, and requires a minimum investment of $50,000.
Cash Is An Alternative
The recent rise in yields has given investors and savers the ability to once again get a solid return on their cash and protect it from the tax of inflation. With real estate softening and volatility in the stock market spiking, cash appears to be king again.