Advisor Perspective

Prompting critical thinking and conversations around issues in our industry. Not intended as personal financial advice.

Cash Management

Over the past decade, most people have not spent a lot of time on cash management, because interest rates were simply too low to justify the effort. In our continued rising rate environment, your effort will now be rewarded so we wanted to share some of the options available to you.

Most of us were taught to transition money from our checking account to our savings account to seek out more interest. And then, if we were certain we didn’t need the money for a little while, we’d want to get paid more interest, so we'd buy a Certificate of Deposit (“CD”) from our bank. This progression from checking to savings to CD does result in earning a higher yield, but there are other options worth exploring.

With the advent of online banks, there is now a very competitive market for “high-yield savings accounts.” Like all bank accounts, these high-yield savings accounts provide you with FDIC insurance. The terms vary by bank, but for many there are no fees, no minimum deposits, and provide same-day transfers between these savings accounts and your checking account. Currently, rates for these accounts are around 3.50% to 3.75%. Interest rates are subject to ongoing change, but this can be a simple, favorable addition to your financial life if you don’t already have one of these accounts.

If you’re seeking a higher rate of interest and don't need the funds for a known period of time, CDs become more attractive. Traditionally, people have bought CDs directly from the bank issuing them. These CDs typically provide a fixed rate for a fixed period of time, and the purchaser is subject to some form of penalty if they want their money back sooner. There are three additional CD options that are not as well known

• No-Penalty CD: these are CDs which still have a stated term/maturity date; however, in exchange for a slightly lower interest rate you are allowed to withdraw money early without penalty. Many people value this flexibility over a higher interest rate.

• Rate Bump CD: knowing the Federal Reserve intends to continue raising interest rates, some people are hesitant to lock in a CD rate. Rate Bump CDs generally allow you to switch to a higher interest rate once during your term without any penalties.

• Secondary versus Primary Market CDs: perhaps the least understood and most valuable option for our clients is secondary market CDs. When you go to your local bank and buy a CD that they are issuing, it is a primary market CD. There is a much larger selection of CDs in the secondary market, which are purchased through financial intermediaries. For example, Meritage buys and sells CDs for clients. We have found that the secondary market offers our clients a greater selection of maturity dates and higher yields than you can achieve buying directly from the bank.

If you’d like any help understanding the cash management options available to you, please let us know.