What’s the best way to store cash without losing its original value?

Image1In July 2023, the Federal Reserve increased interest rates for the eighth time within a year — meaning gone are the days of earning 0% on your cash. And if you still are, then you could be missing out on potential earnings!

To that end, financial advisors are often asked: Now that interest rates have gone up, what’s the best thing to do with your cash?

Keep in mind that for this article, we refer to “cash” as money that’s either set aside for short-term financial goals or kept as a safety net for unexpected expenses. As with anything in life, there's always some level of risk involved. However, there are a few options that allow you to increase the value of your cash without jeopardizing the initial balance that you set aside. If you’re wondering how to store cash in a safe place while letting it grow, check out these low-risk options that could work for you.

Treasury bills

A Treasury bill — often referred to as a T-bill — is a short-term U.S. government debt commitment supported by the Treasury Department that comes with a maturity period of 12 months or less. Typically, T-bills are put up for sale through weekly auctions, with each unit having a value of $100.

Why should you consider T-bills?

Given their endorsement by the U.S. Treasury Department, T-bills can be thought of as the ultimate standard for ensuring the security of both the interest rate and the repayment of your principal amount.

They are accessible to individual investors through various platforms, including government auctions, financial institutions, and online brokerage accounts. Some advantages of Treasury bills include:

  • Capital preservation. T-bills are backed by the U.S. government, which is considered one of the safest entities to lend money to. This ensures a high level of capital preservation, making T-bills an attractive option for those seeking to protect their principal investment.

  • Steady returns. While T-bills typically offer lower returns compared to riskier assets, they provide a predictable and steady source of income in the form of interest payments.

  • Simplicity. T-bills can serve as an introduction to investing for newcomers. Their straightforward nature and low minimum investment requirements make them an accessible option for learning about the investment landscape.

What are the risks of T-bills?

Among the list provided in this article, T-bills typically have the lowest interest rate. They are also subject to the following risks:

  • Inflation. This involves the potential decrease in the value of your investment due to expected inflation.

  • Fluctuating interest rates. Interest rates may rise while you hold the T-bill — potentially causing you to sell it before maturity at a loss.

  • Liquidity risk. Although T-bills are considered highly liquid, unexpected market conditions could impact your ability to sell them quickly.

Series I bonds

A Series I bond stands as a U.S. government savings bond that accrues interest, comprising both a steady fixed interest rate and a variable inflation rate component. These bonds undergo adjustments twice a year, in May and November.

Why should you consider Series I bonds?

Series I bonds are a great option for storing your cash if you’re wondering, “Where can I keep my money besides a bank?” Series I bonds are designed to give an investor a return on their investment in addition to protection from inflation. Some advantages of investing in Series I bonds include:

  • No market risk. Series I bonds are not subject to market fluctuations, providing stability in uncertain economic conditions.

  • Government-backed. Series I bonds are issued and backed by the U.S. government, making them one of the safest investment options available. Your principal is guaranteed, and you don't have to worry about default risk.

  • Low minimum investment. Series I bonds can be purchased with a relatively low minimum investment, making them accessible to a wide range of investors.

What are the risks of Series I bonds?

Series I bonds are not tradable secondary markets and can only be found on the official TreasuryDirect government website. Similar to T-Bills, they offer lower interest rates compared to the alternatives further down on this list. Moreover, they come with a requirement to hold them for at least one year, and if it is redeemed before five years, the holder forfeits the interest earned in the three most recent months. Other risks include:

  • Opportunity cost. Series I bonds may offer lower returns compared to other investment options with potentially higher risk, such as investing in stocks or other higher-yielding bonds. Investing solely in Series I bonds might mean missing out on greater potential earnings.

  • Limited liquidity. Although you can redeem Series I bonds after one year, they are not as liquid as other investments, such as stocks or actively traded bonds. This means that if you need to access your funds quickly, you might face some delays in getting your money back.

  • Market value fluctuations. While Series I bonds are not subject to market price fluctuations, changes in market interest rates can impact the real value of your bond. If interest rates rise significantly, the fixed interest rate of the bond might become less attractive.

Certificates of deposits (CDs)

Provided by a bank or credit union, a certificate of deposit — or CD for short — provides consumers with an elevated interest rate on their cash in return for maintaining a lump-sum deposit that’s untouched for a specified time frame.

Why should you consider CDs?

In most cases, CDs provide a greater interest rate compared to Treasuries, and it's possible to secure an even higher rate by exploring your options, as virtually every bank and credit union provides CDs. A few advantages of CDs include:

  • Predictable returns. CDs offer a fixed interest rate for the duration of the term, providing you with a clear idea of how much interest you'll earn over time.

  • Variety of terms. CDs come with various term lengths, allowing you to choose a maturity period that aligns with your financial goals. Terms can range from a few months to several years.

  • Conservative savings. If you have short-term financial goals or need to preserve funds for an upcoming expense, CDs can be a conservative way to save without exposing your money to market risks.

  • Laddering strategy. You can employ a CD laddering strategy, where you invest in CDs with staggered maturity dates. This provides both regular access to funds and the potential to benefit from rising interest rates.

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What are the risks of CDs?

Although the Federal Deposit Insurance Corporation (FDIC) protects your cash within the insured $250,000 range, it doesn't ensure the interest earned throughout the entire CD term — only up until the point of a bank default. Additionally, if you need to withdraw the funds before the CD matures, you might face a penalty involving a portion or the entirety of the accrued interest. Other drawbacks of CD include:

  • Credit risk. If you're considering CDs from smaller or less established banks, it’s important to note the potential risk of a bank facing financial difficulties — meaning it may not be able to fulfill its obligations. However, CDs from reputable banks are generally considered safe due to federal insurance. Always ensure your CD is FDIC-insured.

  • Fixed terms. Once you invest in a CD, your money is locked in for the duration of the term. If your financial situation changes, you might not be able to access your funds without penalties, so it’s important to understand the benefits and drawbacks of saving vs. investing.

High-yield savings accounts

A high-yield savings account (HYSA) is a type of bank account that offers a relatively higher interest rate compared to traditional savings accounts. These accounts are typically offered by online banks or financial institutions that operate with lower overhead costs, allowing them to pass on the benefits of higher interest rates to their customers.

Why should you consider a high-yield savings account?

High-yield savings accounts are a great place to store your emergency funds or any cash you had sitting in a standard savings account. Some advantages of these types of accounts include:

  • Low fees. High-yield savings accounts often come with minimal or no account maintenance fees. This can help you avoid unnecessary charges and keep more of your savings.

  • Accessibility. If you’re looking for the safest place to keep liquid cash, a HYSA is a good option. Many high-yield savings accounts offer convenient online access, allowing you to manage your account, transfer funds, and monitor your savings from the comfort of your computer or mobile device, whether you're on your couch or on-the-go.

  • Liquidity. High-yield savings accounts offer liquidity, meaning you can access your funds relatively easily when you need them. However, there might be limits on the number of withdrawals or transfers you can make each month without incurring fees.

Similar to CDs, high-yield savings accounts offered by reputable financial institutions in the U.S. are FDIC-insured, typically up to $250,000.

What are the risks of high-yield savings accounts?

The main disadvantage of high-yield savings accounts is that, despite the recent rise in rates, the interest they offer is subject to change since it is variable. This implies that the bank retains the right to modify the rate without prior notification. Other potential drawbacks include:

  • Bank stability. While most high-yield savings accounts offered by reputable banks are FDIC-insured, it's still important to consider the financial stability of the bank you're entrusting with your money. Research the bank's reputation, financial health, and track record to ensure your savings are secure.

  • Potential withdrawal limits. Some high-yield savings accounts may come with limits on the number of withdrawals or transfers you can make within a certain time period, typically a month. Exceeding these limits could result in fees or restrictions on your account, so be sure to check what the limits are.

Which option works best for your financial plan?

You may still be wondering: where is the safest place to save your money? The answer depends on your risk tolerance; therefore, it’s important to weigh your options based on the risks listed above. If you’re still not sure which option is best for you, a financial advisor can help create a plan that best suits your needs!

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Savant Wealth Management
Written bySavant Wealth ManagementContributing writer

Savant Wealth Management, an esteemed financial advisory firm, has been a steadfast pillar of wise counsel in the realm of wealth management since its establishment in 1986.