Barbara A. from Atlanta, GA asks: Hi Mitch, With the assumption that interest rates could come down later this year, do you think now is a good time to lock in relatively high yields with the cash I have in savings? Thank you.
Mitch’s Response:
Thanks for writing, Barbara. I think there are a couple of different ways to answer your question.
In the realm of very short-term, very low-risk options like certificates of deposit (CDs), short-duration U.S. Treasuries, or money market funds, I think now could be a fine time to secure yields at these levels. I would presume that this is short-term/emergency cash that you’re looking to earn a modest amount of interest on.
The path of interest rates in 2024 is still largely unknown, but I think it’s fair to say that the peak of this particular interest rate cycle is likely behind us. In other words, I would anticipate that yields on CDs and short-duration U.S. Treasuries will not move higher this year, and they seem poised to move lower as you suggest.1
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That being said, I’d caution against the mindset of ‘chasing yield’ on cash. The goal of holding cash is really about ensuring safety, maintaining liquidity, and preserving purchasing power. In other words, you should not approach managing cash with the mindset of, ‘how can I earn the most return?’ Doing so almost certainly means you’ll have to sacrifice liquidity or safety to earn that yield, which runs counter to the ultimate objective.
Generally speaking, emergency savings should largely remain in cash and cash equivalents. But I’m also fine with taking a percentage of that cash and purchasing a CD or other very low-risk security to earn some yield in any given year – as long as you know you’re not sacrificing too much liquidity.
The other way I’d approach your question is to press a bit on what type of liquidity needs you have for this cash. I sometimes find that when interest rates move a bit higher and yields become more attractive, investors sometimes think that a 4% or 5% return is satisfactory and addresses their long-term return objectives. But there’s a problem with this type of thinking, in my view. Investors aren’t fully considering the opportunity costs of committing too much cash to these yield-generating securities, especially if that cash is not needed for several years. Doing so means trading a strategy designed for long-term growth for one focused on short-term yield, which can take a significant amount of compounding returns off the table in the process.
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