5 Ways to Maximize Your Return on Cash in a Rising Interest Rate Environment

The Federal Reserve has held interest rates near zero for the last several years, making it difficult for investors to earn a meaningful return on cash. But with inflation still well above the Fed’s 2% target, interest rates are now on the rise. Indeed, rising interest rates may not be welcome in many scenarios. However, there is a silver lining. Investors now have a variety of options to maximize your return on cash while taking on little to no risk—at least for the time being.

Here are five relatively low risk ways to maximize your return on cash:

#1: High-Yield Savings Accounts

High-yield savings accounts are one of the most popular ways to maximize your return on cash. Currently, yields on high yield savings accounts are around 3-4%. This compares to 0.20% for a traditional savings account.

On average, they earn roughly 17 times more in interest than a traditional savings account. Indeed, if you make a $20 weekly deposit, you can save $1,000 in one year due to daily compound interest, according to CNBC Select.

Plus, due to FDIC insurance—the FDIC insures up to $250,000 per depositor—they are a relatively safe option for growing your wealth. That means your funds are protected, even if the bank fails or shuts down.

In addition, high yield savings accounts are liquid. In most cases, you can access your money when you need it without incurring penalties or fees. Lastly, many high-yield savings accounts have no fees or minimum deposit requirements, making them accessible to most savers.

However, there are a few things to keep in mind when considering a high yield savings account. First, interest rates can fluctuate over time, meaning there’s no guarantee you’ll continue to earn an attractive rate. And your cash may not outpace inflation in a high yield savings account, meaning its purchasing power may diminish over time.

#2: Certificates of Deposit (CDs)

Certificates of Deposit (CDs) can be another great way to maximize your return on cash in a rising rate environment. Many CDs currently offer interest rates above 4%, which is higher than the return on most high yield savings accounts.

However, higher yields come at a cost. Primarily, you must keep your money in a CD for a specific period—usually six months or longer—to earn interest.

On the plus side, the FDIC insures deposits up to $250,000 per depositor, per bank. Meanwhile, CDs provide a steady stream of income over the life of the CD you hold it until maturity.

However, if you withdraw your funds before maturity, you may incur a penalty fee. In other words, CDs typically aren’t as liquid as savings accounts. This may be an important consideration if you need access to your cash in the near term.

#3: Money Market Accounts

Money market accounts are another relatively low risk option to maximize your return on cash. Typically, rates on money market accounts fall somewhere between high yield savings accounts and CDs depending on your account balance.

One unique advantage of a money market account is that account holders often have check-writing privileges. This can be helpful if you anticipate paying expenses or making gifts from your cash account while still earning an attractive interest rate. And like savings accounts and CDs, the FDIC insures money market accounts up to $250,000.

On the other hand, money market accounts often require minimum deposits and balance requirements to qualify for the most attractive rates. In addition, be careful not to confuse money market accounts with money market funds. Though money market funds are also relatively safe, the FDIC doesn’t insure them, so they’re not completely risk-free.

#4: Series I Savings Bonds

A Series I Savings Bond (I Bond) is a security that earns interest based on both a fixed rate and a rate that is set twice a year based on inflation. The bond earns interest for a period of 30 years or until you cash it in, whichever comes first.

Since I Bond rates are tied to inflation, they become more attractive as inflation rises. Currently, I Bonds are paying an interest rate of 6.89% if you purchase them from now until April 30, 2023. That means if you buy the maximum ($10,000), you’ll earn $345 after 6 months—guaranteed—assuming you hold the bonds for at least a year.

To purchase I Bonds, you must have a valid Social Security Number and be a U.S. citizen, resident, or civilian employee. Children under 18 cannot open a TreasuryDirect account; however, parents and other adult guardians can purchase I Bonds on behalf of their children.

But there are a few caveats to consider before purchasing I Bonds. For example:

  • Your money is locked up for the first year, so you should only consider I Bonds if you’re sure you won’t need the cash.
  • If you withdraw your funds within the first 5 years, you lose the last 3 months of interest.
  • The interest rate changes every 6 months and is tied to inflation, so it’s difficult to assess opportunity cost beyond the first 6 months.
  • The purchase limit is $10,000 per person, per year, and you can only purchase I Bonds for yourself through TreasuryDirect.gov. You can also buy up to $5,000 in paper using your federal income tax refund.

Ultimately, if you have extra funds on hand that you know you won’t need to access for at least a year, I Bonds may present an attractive opportunity to maximize your return on cash.

#5: Treasury Bonds

The U.S. government issues Treasury bonds to help finance its operations. T-bonds typically mature at par in 20 or 30 years and make bi-annual interest payments. Therefore, if you can purchase a Treasury bond at a discount to par, you benefit from price appreciation and regular interest payments (assuming you hold the bond till maturity).

While Treasury bonds aren’t always attractive investments, recently they have received attention for paying historically high rates. Indeed, as of October 2022, Treasury bonds were paying their highest yields in over a decade. Currently, 20-year and 30-year T-bonds are offering rates just shy of 4%.

Since Treasury bonds have the backing of the U.S. government, many consider them to be among the safest investments in the world. In addition, they can be bought and sold on the secondary market. That means not only are they liquid investments, but there may also be opportunities to capitalize on above-average returns in certain environments.

It’s important to note that if you hold these securities outside of a qualified account, you must pay federal taxes on the interest you earn. However, Treasury bonds are exempt from state and local taxes.

Meanwhile, since investors can trade Treasury bonds on the open market, bondholders may experience price fluctuations at times. This may be especially true in the early years of investing, since T-bonds take many years to mature.

A Trusted Financial Advisor Like Milestone Asset Management Group Can Help You Maximize Your Return on Cash

Indeed, there are many opportunities right now to maximize your return on cash. Ultimately, the decision comes down to your long-term financial goals and near-term liquidity needs.

A trusted financial advisor like Milestone Asset Management Group can help you determine the best way to allocate your financial resources to achieve your financial needs and goals. Our team of experts can also help you develop a long-term plan for your money, including proactively minimizing your tax liability and efficiently transferring your estate when the time comes.

To speak with a member of our team and see if we may be the right fit for your financial planning needs, please schedule an introductory meeting. We look forward to hearing from you.