 |
The recent economic turmoil has caused concern among investors, leading many to seek a safe haven for their cash. However, finding the best place to park your money during a banking crisis isn't always straightforward. While it's true that keeping your money in a bank account is the easiest option, it may not be the most lucrative.
Despite the current strain on the banking sector, the FDIC still insures bank account balances up to $250,000. However, checking accounts offer very little return on your money, which is why it's worth considering higher-paying alternatives such as high-yield savings accounts, money-market funds, certificates of deposit, and short-term Treasurys. These options are all offering interest rates between 3% and 5%.
Although financial advisers caution against timing the market and suggest that holding cash may mean missing out on potential gains, some investors may prefer to sit out the stock swings for the time being. Here are some pros and cons to consider for each of the aforementioned options:
High-Yield Savings Accounts
High-yield savings accounts pay interest rates that fluctuate with those set by the Federal Reserve, currently around 3% to 4%. They are an excellent choice for low-risk investors who want the flexibility to withdraw their funds at any time. They are also typically insured by the FDIC, adding an extra layer of protection.
For those seeking to set aside six-to-nine months of living expenses for emergencies, financial planning practices such as G-Squared Advisory recommend high-yield accounts like Marcus by Goldman Sachs, which offers 3.75% interest, or Capital One's 360 Performance Savings account, which earns 3.40%.
Money-Market Funds
Money-market funds invest in short-term debt securities, including Treasury bills and commercial paper. They have seen significant investment recently, with investors pouring more than $115 billion into them during the week ending March 22, the largest weekly net inflow since the spring of 2020.
Money-market funds offer the best choice for investors looking for higher yields on their cash. Amy Arnott, portfolio strategist at Morningstar Inc., recommends the Fidelity Government Money Market Fund because of its low fees and 4.35% yield, or the Schwab Government Money Fund, which charges 0.34% and earns around 4.26% in yield. Although money-market funds usually aren't FDIC-insured, they are still a suitable option for investors willing to take on more risk.
Certificates of Deposit
Certificates of Deposit, or CDs, are among the safest investments and offer higher interest rates than regular savings or checking accounts. However, they come with the downside of locking your money up for a set amount of time, usually between three months and two years. They are ideal for investors who don't need their cash for months or years.
One other disadvantage of CDs is that the interest rate is fixed ahead of time, meaning investors may miss out if the Fed raises rates. For investors seeking CDs, G-Squared's Ms. Girsky recommends Capital One's 12-month 360 CD, which pays 4.15%, or Synchrony's 14-month CD, which pays 5%.
U.S. Government Bonds
You can also invest in Treasury bills through money-market funds or purchase them directly from the government on the TreasuryDirect website, which avoids fees and gives investors greater control over which bonds they buy. Founder of investment advisory firm Wealth Logic LLC, Allan Roth, recommends Treasury bills, which get hurt less than longer-term bonds when rates rise. The yield on a six-month Treasury bill is around 4.719%, while a one-year Treasury bill is at 4.282%.
In conclusion, there are several safe and potentially lucrative options for investors looking to park their cash during a banking crisis. While bank accounts are insured by the FDIC, they offer very little return on investment. High-yield savings accounts, money-market funds, certificates of deposit, and short-term Treasuries all offer higher interest rates, with yields ranging from 3% to 5%. Each option has its pros and cons, so it's important for investors to consider their risk tolerance, investment horizon, and financial goals before making a decision. By carefully weighing their options, investors can find a safe haven for their cash during economic uncertainty.
