4 Strategies to Get a Good Return on Your Cash-In Spite of Low Interest Rates
Are you frustrated trying to get a good return on your cash?
Are you sick of meager interest payments on your savings?
Does it bother you to earn a 10 cent interest credit on your account?
I remember the old days when you could get a good return on your cash. During the 1980’s savings rates were 8 to 10 percent. But along with those juicy returns was higher inflation. So even if we got an 8% return on our bank money market account, if inflation was 8%, we weren’t getting any real return for that interest payment.
The low interest rates are likely to stick around for awhile. Although the Fed raised their target rate 0.25% last year, even a few more increases aren’t going to prop up those savings account rates much. Anyone with money to invest in a savings account, CD, or short term bond fund is impacted by low interest rates. Particularly hard hit are retirees hoping to live on their savings. The historically low savings rates are slashing retirees lifestyles.
If you’re looking to get a good return on your cash, preferably above 0.25%,you’ll need to do some digging around.
Why You Need Cash
You need to keep a certain portion of your money in a liquid, cash-type account for short and intermediate term goals. If you’re thinking about buying a house or a car in a year or so, don’t put the down payment in the stock market. You also need to be prepared for those pesky emergencies; a leaky roof, a blown gasket, or that unexpected medical bill. Additionally, during periods of investment market drops, it’s nice to know that all your money isn’t becoming less valuable and only the portion invested in a falling stock market!
Here are a few ideas to earn a get a good return on your cash.
1. TIPS-Treasury Inflation Protected Securities
Treasury Inflation Protected Securities (TIPS) won’t make you rich, but when inflation increases, so will these investments. But for now, inflation is quite tame, so in the short run, TIPs won’t earn much more than your paltry savings account but they have the potential for increasing returns.
How does the TIPS investment work?
- With TIPS, the interest rate is set at the purchase date. It always stays the same.
- The principal value of the investment goes up and down with the inflation rate.
- When the principal increases (decreases) you will get a larger (smaller) interest payment on the new principal amount.
- When the TIPS security matures, you get the higher or original principal amount; At maturity, you never get a smaller principal.
2. Series I Government Bonds
Series I (for inflation) Governement Bonds are similar to TIPS. With I bonds you not only get a fixed interest rate, but you get a bonus; an adjustable rate of interest that changes every six months, along with the inflation rate. So the combined interest rate includes a fixed interest rate plus an inflation adjusted rate for a new combined interest rate which adjusts every six months. These bonds can be bought at your bank for as little as $100 in an amount up to $10,000.00 per year. They are among the best choice for inflation protection.
3. Short Term Bonds
If you have a larger portfolio, you can buy individual bonds which mature within the next 1-3 years. Check your discount investment broker for available issues. If you prefer, there are short term bond funds which will increase your investment returns a bit. For example, the Vanguard Short Term Index Bond Fund (VBISX) or a related ETF (BSV). Each of those short-term bond index funds yield 1.39% and 1.45% respectively (the return will change based upon market forces). Also, be aware that unlike your bank savings account or certificate of deposit, the principal value can fluctuate.
Read more; Do You Think Bonds Are a Good Place to Invest Now?>>>
4. Certificates of Deposit
A recent visit to GoBankingRates.com turned up a 5 year CD with an annual percentage yield (APY) of 2.25%, a 3 year CD that yields 1.40% and a 1 year CD earning 1.25%. To take advantage of the potential for future interest rate returns you might ladder the CDs. That means put part of your cash in each of the terms, 1,3, and 5 year CDs. That way when one CD comes due, you can reinvest the proceeds and receive the higher future yield.
Divvy up your available cash among the 4 options. You’ll diversify your cash holdings and your returns. Don’t be too disappointed with the low returns on your cash. With lower inflation rates, and lower gas prices, your expenses may be holding steady as well.
Print out: How to Get a Good Return on Your Cash
Although the present returns are quite low, they will go up. Print this list out and save it. These are some good ideas for your short term funds. One thing I’ve learned from decades in the financial markets, rates go up and down. For those borrowers out there, there will come a time when you are crying for these low interest rates. For the savers and fixed investors, rates are bound to rise.
In sum, get the best rate you can but don’t tie your money up for too long as rates will eventually go up. Realize that you’re in good company as Timothy W. Martin and Sarah Krouse recently reported in the Wall Street Journal, “Latest Fund Fashion: Cash”, mutual fund managers are also holding on to cash. In fact, they report presently holding the highest percent of cash since 2007.
You might also enjoy my GoBankingRates article; 11 Better Things to Do With Your Cash Than Hoarding it in Your Checking >>>
A version of this article was previously published.