Earning More Interest On Your Cash
While people commonly hold their cash within checking and savings accounts, we want to highlight three short-term, interest-bearing investments that can be held within your investment account.
By Investment Associate Bobby Adusumilli, CFA.
One of our roles as advisors is to look for opportunities to allow your money to work better for you. Cash is often one of the most overlooked assets when it comes to improving someone’s investment returns. People may have large amounts of cash for a variety of reasons: emergency fund, saving for a house down payment, planning to buy a new car, etc. We often see people accumulating cash in their checking account without really thinking about it. Particularly today, with short-term U.S. Treasury bonds paying upwards of 5% interest on an annualized basis, we view this as a missed opportunity to earn more interest.
There are many ways to potentially increase the amount of interest you receive on your cash savings while still investing in something that is low risk and readily transferable to your checking account within a few business days. While people commonly hold their cash within checking and savings accounts, we want to highlight three short-term, interest-bearing investments that can be held within your investment brokerage account:
Sources: Average Interest-Bearing Checking Account and Average Savings Account: "Bankers Resource Center: National Rates and Rate Caps". FDIC, 20-May-2024, fdic.gov. Schwab Value Advantage Money Fund (SWVXX): "Schwab Value Advantage Money Fund® - Investor Shares". Charles Schwab, 31-May- 2024, schwabassetmanagement.com. One-Month Treasury Bill: "Daily Treasury Par Yield Curve Rates". U.S. Department of the Treasury, 31-May-2024, treasury.gov. Dimensional Ultrashort Bond ETF: "DUSB: Ultrashort Fixed Income ETF". Dimensional Fund Advisors, 31-May-2024, dimensional.com. Yield will not necessarily equal realized returns. See Important Disclosure Information.
Money market fund: A mutual fund that continually invests in ultrashort-term (around one-month on average), high-quality bonds. Money market funds accrue interest daily (interest is typically paid monthly) and are not expected to fluctuate in price. As a mutual fund, they are subject to an expense ratio. A good proxy to determine how the interest rate of a money market fund may change over time is to take the interest of a one-month Treasury bill and subtract the expense ratio.
U.S. Treasuries: Treasury bills, notes, and bonds (Treasuries) are issued directly by the U.S. government for terms ranging from one month to thirty years, as detailed in the chart below. They are subject to federal income tax, but not state or local income tax. Treasury bonds are often cheaper to buy and hold than money market funds, though you have to decide what you want to do with the money when the Treasury matures. You can sell Treasuries before they mature, though the value does fluctuate if sold before maturity. You can buy Treasuries through most major investment brokerage platforms including Charles Schwab.
Ultrashort bond ETF: An ETF (exchange traded fund) that continually invests in ultrashort-term, investment-grade bonds. Ultrashort bond ETFs typically range in average maturity from three months to one year. Compared to a money market fund, ultrashort bond ETFs usually invest in slightly longer-term bonds and have more exposure to corporate bonds, though any additional risk is typically accompanied by higher expected interest. Many ultrashort bond ETFs have lower expense ratios than various money market funds. It is important to note that ultrashort bond ETFs will fluctuate in price to some degree.
With interest rates rising over the last few years, we have had a lot of conversations about cash with clients. If you would like to discuss ways you can earn more on your cash, please feel free to reach out to us.
Source: U.S. Department of the Treasury, as of June 30, 2024. See Important Disclosure Information.
Important Disclosure Information:
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.
SJS Outlook: Q2 2024
This Outlook includes Founder & CEO Scott J. Savage’s gratitude for your 40 years of trust, how you can earn more interest on your cash, welcoming new SJS Team members, and looking forward to Q3 2024.
Growing Your Cash
You can consider putting excess cash into a money market fund, short-term U.S. Treasury bonds, or a short-term bond mutual fund / ETF.
By Chief Investment Officer Tom Kelly, CFA.
Interest rates are up everywhere. Except perhaps your bank account. While the Federal Reserve's rate hikes and skyrocketing mortgage rates dominate headlines, the fine print in your bank account statement, revealing the interest rate on your savings, isn’t making the same amount of noise. Perhaps it should, and for all the wrong reasons.
The national average rate for a bank savings account is a paltry 0.45%, as of September 2023.[1] While these rates have been low for quite some time, there have not been obvious and safe alternatives… until recently! One-month Treasury Bills now yield 5.55% on an annualized basis as of September 29, 2023.[2] Additionally, one-year rates are at 5.46% as of September 29, 2023.[3] These are short-term rates we haven’t seen in over 20 years.
See Important Disclosure Information.[1][2][3]
One of the key roles of an advisor is to identify opportunities in the market. And while they don’t always exist, or persist, we believe that this is an important area to pick up yield if you have excess cash on the side. You can consider putting that excess cash into a higher-yield money market fund, short-term U.S. Treasury bonds, or a short-term bond mutual fund / ETF. Please reach out to us to discuss the best options for your situation.
Important Disclosure Information & Sources:
[1] “National Deposit Rates: Savings, Percent, Monthly, Not Seasonally Adjusted”. FRED, September 2023, fred.stlouisfed.org.
[2] “Market Yield on U.S. Treasury Securities at 1-Month Constant Maturity, Quoted on an Investment Basis, Percent, Monthly, Not Seasonally Adjusted”. FRED, September 2023, fred.stlouisfed.org.
[3] “Market Yield on U.S. Treasury Securities at 1-Year Constant Maturity, Quoted on an Investment Basis, Percent, Monthly, Not Seasonally Adjusted”. FRED, September 2023, fred.stlouisfed.org.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training.
Hyperlinks to third-party information are provided as a convenience.
Generating Cash Without Selling Your Business Or Investments
I offer two cash-generating ideas in lieu of selling your business or investments that have gone way up in value.
By SJS Investment Services Founder & CEO Scott Savage.
Andrew Carnegie – steel tycoon, philanthropist, and one of the wealthiest businessmen of the 19th century – once commented about creating wealth:[1]
“Put all of your eggs in one basket, and then watch that basket.”
Does that advice surprise you? Many SJS clients have generated their wealth through concentrated bets that began as small investments - often creating their own businesses - and grew over time.[2]
As these investments increase in value, some clients no longer want their individual business concentration risk, and instead want to diversify their investments in order to preserve their wealth for the long-term. They are willing to pay the necessary taxes associated with realizing capital gains from selling a portion of their business.[3]
Conversely, others want strategies that help them generate cash without selling their business - in order to maintain ownership, keep voting authority, avoid associated taxes from selling, or just to wait to implement their estate plan.[4]
My Dad used to tell me, “Scott, there are two ways to get to the top of an oak tree. One, you can climb it. Or two, you can sit on an acorn and wait!”
As business owners, if we sit around waiting for something good to happen to us, we may be in for a long wait! The “trick” that most successful business owners know is we have to get out of our comfort zones and make something happen. So, I offer two cash-generating ideas in lieu of selling your business or investments that have gone way up in value.
Securities-Based Lines of Credit
Securities-based lines of credits (SBLOC), also known as securities-based loans, are becoming an increasingly popular go-to option to allow business owners to generate cash without selling their businesses.[4] When a business owner says they are “recapitalizing” their business, they may be referring to SBLOCs.
Negotiated directly with a bank or other lending institution, SBLOCs are highly customizable; depending on the lender, you can receive an SBLOC up to 50% of the value of your collateral, which is typically valued based on a third-party evaluator. Investments that can serve as collateral include a private business, public stock, and certain derivative holdings.[5]
Depending on the specific terms, potential benefits of SBLOCs include receiving cash without giving up voting authority in your business, lower interest rates than other types of loans, flexible repayment schedules, avoiding capital gains taxes that would result from selling appreciated assets, and not showing up on credit reports.[4] If you work for a publicly-traded company and are required to disclose your holdings, then you may be required to disclose the collateralized loans against that particular security. However, most other loans collateralized against other assets often do not need to be disclosed.[4]
As with any customized loan arrangement, it is critical to thoroughly understand the details ahead of time. The SEC released an Investor Alert in 2015 to help people considering SBLOC loans better evaluate specific details, particularly emphasizing ten questions to ask before taking out an SBLOC:[6]
Many regional and major banks offer SBLOCs. If you are comfortable taking on a loan, paying interest, and using your business or investments as collateral, then an SBLOC may be a good option for you.
Covered Call
If you own large amounts of a publicly-traded stock, you can potentially generate cash by selling a call option on that stock (also known as a covered call). A call option is a derivative contract that enables the holder of the call option to purchase the underlying security at a pre-specified price. By selling a call option, you receive an upfront premium, but if the call option holder decides to exercise the call option, then you may be required to provide the call option holder with the underlying stock, or pay the difference in value between the call option strike price and the current value of the underlying stock.[7] Therefore, a covered call limits your downside as well as limits your upside of your underlying stock holding.
Covered calls are generally only available for larger public stocks. Since call options are relatively expensive to create and trade, they are usually used by larger investors. Because call options typically expire within one year, you would need to sell a call option at least once per year, or use another strategy to generate recurring cash. Additionally, any net income from the covered call as of the call option’s expiration date is subject to the appropriate capital gains (usually short-term) taxes.[8]
Because you may be required to deliver the underlying stock to the counterparty, as well as the complexity and taxes associated with selling call options, we generally advise for investors to only consider covered calls if they need money in the short-term, don’t have other simpler sources of financing, and would be agreeable to selling the security if it reaches an acceptable price.
Conclusion
There are many ways to generate cash without selling your business, each coming with its own benefits and tradeoffs. SJS has over 26 years of experience helping business owners and high net-worth individuals implement these strategies. If you want to discuss whether any of these strategies are appropriate for you and how you could implement them, please feel free to reach out to us.
Important Disclosure Information & Sources:
[1] “Put All Your Eggs in One Basket, and Then Watch That Basket“. Quote Investigator, 16-Feb-2017, quoteinvestigator.com.
[2] “How People Get Rich Now“. Paul Graham, Apr-2021, paulgraham.com.
[3] “Ways to Cash Out of Your Business”. Laura Lorber, 11-Sep-2008, wsj.com.
[4] “Buy, Borrow, Die: How Rich Americans Live Off Their Paper Wealth”. Rachel Louise Ensign and Richard Rubin, 13-Jul-2021, wsj.com.
[5] “Securities-Based Lending“. Lucas Downey, 26-Aug-2020, investopedia.com.
[6]“Investor Alert: Securities-Backed Lines of Credit“. U.S. Securities and Exchange Commission, 21-Dec-2015, sec.gov.
[7] “The Basics of Covered Calls“. Alan Farley, 20-Apr-2021, investopedia.com.
[8] “Tax implications of covered calls“. The Options Institute At CBOE®, 2013, fidelity.com.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Suggested Reading
Is Your Cash Keeping Up With Inflation?
Cash management remains vital to both risk mitigation and capital preservation. How can you increase your expected return via cash-like holdings?
By SJS Investment Services Chief Investment Officer Tom Kelly, CFA.
The adage “Cash is King” has been used in investing to highlight the value of holding on to cash to both protect an investor from having to withdraw when the markets are down, as well as the ability to deploy cash and purchase when prices become cheaper. However, over the last decade, with interest rates kept low near the anchoring Fed Funds rate, inflation has outpaced the interest rate on cash, leading to that cash losing its spending power over time.[1]
In the US, the erosion of cash value has been greater in recent times than previous periods, with cash trailing inflation since 2009, seen below. We believe this trend is likely to continue, with the Federal Reserve indicating they will continue to keep interest rates near 0%, all the while continuing to provide stimulus to the economy, leading to a 5-Year Breakeven Expected Inflation Rate of 2.35% as of February 23, 2021.[2][3]
Source: Morningstar. Cash represented by the US Treasury T-Bill Secondary Market 3 Month Rates. Inflation represented by the US Bureau of Labor Statistics Consumer Price Index All Urban Seasonally Adjusted Index. See Important Disclosure Information.[4]
Cash management remains vital to both risk mitigation and capital preservation. How can you increase your expected return via cash-like holdings? Online banks sometimes offer higher savings account interest rates than traditional banks due to their lower fixed physical costs. Depending on the holding time horizon, cash alternatives may include Treasury Inflation-Protected Securities (TIPS) or other higher-quality short-term bonds. Furthermore, both real estate and stocks have historically significantly outperformed inflation over the long-term, though they typically add significantly more volatility over the short-term.[5]
Prudent cash management can add incremental value to your overall portfolio investment return. If you have any questions regarding your cash management, please feel free to reach out to us.
Important Disclosure Information And Sources:
[1] “How Inflation Affects Your Savings Account.“ Justin Pritchard, 07-Jan-2021, thebalance.com.
[2] “Powell Pledges to Maintain Fed’s Easy-Money Policies Until Economy Recovers.” Paul Kiernan, 24-Feb-2021, wsj.com.
[3] “5-Year Breakeven Inflation Rate.” Federal Reserve Bank of St. Louis, 23-Feb-2021, fred.stlouis.org. The breakeven inflation rate represents a measure of expected inflation derived from 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation-Indexed Constant Maturity Securities. The latest value implies what market participants expect inflation to be in the next 5 years, on average. See Important Disclosure Information.
[4] The US Treasury T-Bill Secondary Market 3 Month Rates are the daily secondary market quotation on the most recently auctioned Treasury Bills for the 13 week maturity for which Treasury currently issues new Bills. Market quotations are obtained at approximately 3:30 PM each business day by the Federal Reserve Bank of New York. The rate at which a Bill is quoted in the secondary market and is based on the par value, amount of the discount and a 360-day year.
The US Bureau of Labor Statistics Consumer Price Index All Urban Seasonally Adjusted is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers. This particular index includes roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force.)
[5] Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies. Jeremy Siegel, 2014, McGraw-Hill Education.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. This material has been prepared for informational purposes only.
Statements contained in this post that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.