Maximize Your Cash Returns: Act Now Before Rates Fall
With an interest rate drop likely, maximizing earnings on our clients' cash holdings is crucial.
We believe rates are likely to decrease this year due to the Federal Reserve’s guidance stating they will start reducing their Fed Funds rate soon (the dotted blue line is the Fed’s projected rate decrease):
Cash yields, such as money markets and saving accounts, closely track the Fed funds rate. Currently, the Fed funds rate is just over 5%, however, the Fed projects it will decrease this rate to around 3% over the next few years (which would simultaneously decrease cash yields by the same amount).
Additionally, this rate will most likely go down further if we experience a recession. We encourage clients to consider locking in today’s rates with certificates of deposit (CDs) or U.S. Treasury bonds, using cash equivalent funds they do not need immediate access to.
What is a Laddering Approach?
A ‘laddering approach’ entails purchasing multiple holdings at once (for example, from three months out to two years) to lock in yield collectively. This approach also accommodates liquidity needs as the holdings mature every three to six months with the ability to roll funds back into new CDs or Treasury bonds if funds are not needed.
Our firm uses Charles Schwab to custody client assets. As shown in the Schwab pricing chart below, both CD and Treasury rates remain above 5% up to the one-year maturity mark. Consequently, we recommend locking in a rate above 5% for a portion of your short-term savings, considering your budget and spending needs over the next year.
Lastly, the two-year maturity rates currently at 4.8% for longer-term liquid savings may look very attractive if rates drop to the Fed’s approximate 3% yield over the next few years.
Have questions or want to speak with our team directly? Contact us.
Robert Amato, CFP®, CIMA®
Principal
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Compass Wealth Management is a Registered Investment Advisor. Advisory services are only offered to clients or prospective clients where Compass Wealth Management and its representatives are properly licensed or exempt from licensure. This article is solely for informational purposes and is not intended to be relied on as a forecast, research, or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Compass Wealth Management to be reliable, are not necessarily all-inclusive, and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investments involve risks.