Cash, meaning savings accounts, money market funds, and other cash-equivalent investments, have been yielding next to nothing since the beginning of the pandemic. Even before the pandemic, the federal funds rate† peaked around 2.40% in early 2019. If we go back even further, the federal funds rate was near zero from the beginning of 2009 through the end of 2015. For over a decade, except for a brief period a couple years ago, cash has been yielding essentially nothing. It may feel like the opportunity cost of keeping your emergency fund and other short-term savings in cash is enormous.
You’ve totally nailed your previous articles but I think there’s a significant hole in this one.
You say “There is no great alternative to cash that is just as safe and secure and pays a reasonable rate of interest.”
But what about i-Bonds? Because the purchase is from the US Government they are safe and secure. And, they certainly typically pay a (more than) reasonable rate of interest! It pays at least the inflation rate (set every 6 months) and can never earn below 0% even if we are in deflation. It is currently paying 3.54% (annually) guaranteed for the current six-month period.
Sure, because you can’t access the funds until 12 months later maybe someone decides they don’t want to use it for an emergency fund (though lots of people do and there’s ways to make this work if you plan well and frontload it or regularly buy them). But, if you can stomach the one year no access period, it’s fantastic for anything else short-term.
You define short-term as less than five years. Thus, i-Bonds would seem to be a perfect option for someone who is saving for a 2 to 5 certain purchase and would be much better than just leaving it in a savings account. Especially with inflation where it currently is and could go.
And yes if someone cashes out say two years later there is a withdrawal “penalty” for holding it less than five years but you only lose the last three months of interest which in reality is not that big of a deal. In this example if they were earning 3.54% over that 2-year time period it would be essentially as if they were still earning 3.1%. Pretty darn good if you ask me!
Great article. I needed this one. I kept saying to myself why do I keep building up my liquid cash if it is not making any money. Thanks
Hey Daniel,
You’ve totally nailed your previous articles but I think there’s a significant hole in this one.
You say “There is no great alternative to cash that is just as safe and secure and pays a reasonable rate of interest.”
But what about i-Bonds? Because the purchase is from the US Government they are safe and secure. And, they certainly typically pay a (more than) reasonable rate of interest! It pays at least the inflation rate (set every 6 months) and can never earn below 0% even if we are in deflation. It is currently paying 3.54% (annually) guaranteed for the current six-month period.
Sure, because you can’t access the funds until 12 months later maybe someone decides they don’t want to use it for an emergency fund (though lots of people do and there’s ways to make this work if you plan well and frontload it or regularly buy them). But, if you can stomach the one year no access period, it’s fantastic for anything else short-term.
You define short-term as less than five years. Thus, i-Bonds would seem to be a perfect option for someone who is saving for a 2 to 5 certain purchase and would be much better than just leaving it in a savings account. Especially with inflation where it currently is and could go.
And yes if someone cashes out say two years later there is a withdrawal “penalty” for holding it less than five years but you only lose the last three months of interest which in reality is not that big of a deal. In this example if they were earning 3.54% over that 2-year time period it would be essentially as if they were still earning 3.1%. Pretty darn good if you ask me!
People can see more about i-Bonds and the rate of return history here: https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm
Thoughts?