By Brennan Zizzi

Recently, we have noticed a continued trend of banks being extremely slow to raise the interest rates on their traditional checking and savings accounts, especially for their already existing customers. This is costing people thousands of dollars a year in lost interest depending on how much cash is sitting idle in those bank accounts.

Below, we wanted to take a deeper look at some of the alternatives to traditional checking/savings accounts and how these other options might help people to increase the returns on their cash.

What Is "Cash"

First, a little Economics 101 refresher on cash. The term “cash” is most often associated with the aforementioned traditional checking and savings accounts found at banks. In broader terms, cash and cash equivalents refers to many types of investments that are highly liquid and can easily be converted into cash used to buy and sell everyday items. Liquidity (the ease with which an asset can be converted into cash) is the defining characteristic of each type of cash and cash equivalent. As with any investment, there are cost/benefit trade-offs between various cash vehicles outlined below. Let’s look at four types along with Treasury I Savings Bonds.

Checking And Savings Accounts

Checking accounts and physical money are the two most liquid types of cash. These are legal tenders that can be used to transact business between parties, enabling the seamless buying and selling of goods and services. Having the benefit of being the most highly liquid comes at the cost of being non-interest bearing and a poor store of value long-term. FDIC insured.

Savings Accounts/High Yield Savings/Money Market

Interest bearing savings accounts found at banks and credit unions are the next most liquid type of cash investment. Transactions (with the exception of some that allow electronic transactions and check writing) cannot be conducted from savings accounts. Depending on the account type and institution, there may be limits on the number of transfers that can occur monthly (e.g. 6). In order to compensate for this loss of liquidity, savers are compensated by earning higher yields and more interest on these funds. FDIC insured.

Money Market Mutual Funds

Money Market Mutual Funds are cash-like investments held inside investment accounts such as individual brokerage accounts and retirement accounts. MM mutual funds are intended to preserve principal by maintaining a value of $1 and earning interest. In order to do so they buy ultra short term debt securities such as treasury T-bills and commercial paper and pass on the interest to shareholders. As such, depending on the interest rate environment, MM mutual funds have the opportunity to earn much higher yields than the previously discussed bank savings vehicles. Although very secure in nature, especially government money market funds, they are not FDIC insured. They must be bought and sold like mutual fund investments, which means it does take time for the funds to transact and transfer to a bank account.

Treasury T-bills

T-bills are short-term debt securities issued by the U.S. Government. They are issued in Maturities ranging from four weeks up to one year. T-bills have a fixed rate of return and if held to maturity are redeemed at face value. If T-bills are not held to maturity there is a chance of loss of value. Versus other cash investments, they have potential for higher returns, but also have a necessary holding period (to maturity) to guarantee full face value is received.

Treasury “I” Savings Bonds

Have A Strategy For Your Cash

Final Thoughts

Cash may preserve wealth, but it won’t build wealth!