At Impact Capital, we have always encouraged you to implement financial strategies that will grow and nurture your investment portfolios. As economic circumstances change, so do our recommended courses of action. Here are a few things you can do now to take advantage of current interest rates.
Get Paid More Interest on your Cash
You should take advantage of the opportunity to get paid more interest on your cash now that the Federal Reserve has raised short-term interest rates to 5%. We will review some of the investment vehicles that will likely pay higher interest rates than your neighborhood bank. Your Charles Schwab brokerage account can be linked to your bank account to make transferring funds back and forth free and easy. Impact Capital does not charge an advisory fee on cash and equivalents for the firm’s existing clients.
Charles Schwab Money Market Funds
This is a good option for any funds you need to access within the next three months. The Schwab Value Advantage Money Fund (SWVXX) pays 4.85% net of fees, and Charles Schwab charges 0.34%/year to administer the fund. If you have cash in your Charles Schwab brokerage account, all you have to do is buy this fund.
There is no minimum initial investment amount, and the interest – which is taxable — will be credited to your account on a monthly basis. The rate of interest will change over time and is expected to follow the direction of short-term interest rates. The fund can be sold within a day without any penalties.
There is also another share class of this fund, SNAXX, which offers a slightly lower fee of 0.19%, with a correspondingly higher interest rate of 5.00%. There is a $1,000,000 minimum investment for this share class. You can learn more about the funds here.
United States Treasury Bills
If you don’t need the cash for at least three months, you can earn a higher interest rate and get a state income tax break by purchasing 3-month Treasury Bills.
Right now, the yield on a 3-month Treasury Bill is 5.20%. This is particularly timely, considering the 3-month rate is higher than all the other Treasury Bill durations. Treasury Bills are offered over 4 weeks, 8 weeks, 13 weeks, 17 weeks, 26 weeks, and 52 weeks, and are purchased at a discount. At maturity you are paid the par value, which means that once you buy the Treasury Bill, your interest rate is locked in for the duration of the Treasury Bill if you hold it to maturity.
You can sell your Treasury Bills at any time for the current price. Just understand if you sell before maturity, you will likely miss out on some of the interest since the selling price would likely be below par.
Which Duration Should I Buy?
There’s no way to know with certainty what interest rates will do in the future. If rates increase, then the shortest duration bills are best so you can quickly reinvest at the higher interest rate. If rates decrease, then the longest duration bills are best so you can enjoy the higher rate for longer. Since we don’t know what interest rates will do in the future, it may be prudent to own multiple durations of Treasury Bills.
Certificates of Deposit (CDs)
CDs are popular, but the rates available are less than those available through the 3-month Treasury Bill and there is no state income tax break.
CDs also come with different maturities, but right now, CD rates across different maturities are all pretty similar. The most common risk that could present itself is if you will need your funds before the CD matures.
Like the Treasury Bill, you can sell the CD, but will likely miss out on some of the interest earned.
The Debt Ceiling Risk
Raising the debt ceiling has become a political issue, with the U.S. Treasury Department now expected to run out of money in June. The U.S. has never defaulted on paying its debt obligations before, but it has come close.
Should the debt ceiling not be raised before June, the Treasury Department will be expected to make all payments on the government’s existing debts, such as U.S. Treasury Bills, by issuing new securities for the same amount of the maturing securities.
Please don’t hesitate to contact your wealth management advisor with any questions about the appropriate strategy for you.