Take Advantage of Highest Interest Rates in More Than a Decade.
Financial advisors typically advise clients to hold enough money in an emergency fund to cover 3-to-6 months of household living expenses, and in some cases emergency funds are set up to cover a year’s expenses. Unknowingly, many families are keeping these funds in checking accounts, which typically pay very-little-to-no interest. In today’s high interest rate environment, these funds can be earning thousands of dollars more annually in interest, while not taking on any additional risk. Here are three sensible options:
1. Buy Short-Term Treasury Bills.
Short-term treasuries, backed by the full faith of the US Federal government, are a very attractive investment – they currently yield slightly more than 5% and interest is not taxed on the state level, which would benefit residents in states such as California, New York, New Jersey and many others. Additionally, short-term treasuries are fairly easily purchased in a brokerage account or a TreasuryDirect account. However, holders of these bills have to be vigilant in reinvesting the money upon maturity. A way to eliminate the need to closely monitor maturities would be to invest in a short-term treasury ETF, such as BIL (SPDR® Blmbg 1-3 Mth T-Bill ETF), but note these investments carry fees (BIL fee = 13.5bp).
2. Move Funds to a High-Yield Online Savings Account.
These accounts are FDIC insured up to $250,000 per depositor and right now, the best high-yield accounts have rates approaching 5%. Be sure to check the account’s minimum deposit and ongoing balance required and if there are any ongoing account maintenance or other fees. These accounts may also have a limit on the number of times that you can move or withdraw money each month. However, if this is your emergency fund, you should not be touching it often.
3. Purchase a Money Market Mutual Fund.
Money market mutual funds typically invest in very short-term (often overnight) maturity debt securities of investment-grade companies, and thus are minimal credit risk, low-volatility investments despite not being insured by the government. Many top brokerage companies – e.g. Fidelity, Vanguard, Schwab, offer money market mutual funds which have very large diversified portfolios (> $50 billion) and currently yields nearly 5%.
Important Disclosures
The information contained herein reflects the opinion and projections of Bergamot Asset Management LP (“Bergamot”) as of the date of publication, which are subject to change without notice at any time subsequent to the date of issue. Bergamot does not represent that any opinion or projection will be realized. All information provided is for informational purposes only and should not be deemed as legal, tax, investment advice or a recommendation to purchase or sell any specific security. This shall not constitute an offer to sell or the solicitation of an offer to buy any interest in any fund managed by Bergamot or any of its affiliates. While the information presented herein is believed to be reliable, no representation or warranty is made concerning the accuracy of any data presented. Market conditions can vary widely over time and can result in a loss of portfolio value. Past performance does not guarantee future results.
