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Options To Earn on the Cash You Save
Saving for a house or a car? Wanting to take a big family vacation to Europe in 18 months? Or plan to spend the money on something else within the next three to five years — and therefore need to abstain from investing, in accordance with money expert Clark Howard's advice?
You have options. One of those options is to buy Treasury bonds, which I’ll discuss shortly. You can also stuff your cash under the mattress. But so far this year, inflation is eating away your purchasing power by the day.
Here's where you can put your cash in the short term to at least earn something.
Choices To Stash Your Cash: Bank Options
- Savings account: As of early this year, even the best high-yield savings accounts paid little more than 0.5% interest per year.
- Certificate of Deposit (CD): CDs are similar to savings accounts. But you agree to lock up your money with a bank for a period of time in order to lock in a slightly better interest rate. The Federal Reserve has started raising rates already this year and should continue to do so. Locking yourself into a CD could end up paying less than holding the money in a savings account for the same amount of time.
Choices To Stash Your Cash: Non-Bank Options
- Money market fund: Like Treasurys, money market funds are investments in short-term debt. But fund managers had to eat fees in recent years. Otherwise, investors could've "earned negative yield" (lost money). In the first quarter of 2022, retail money market yields rose 0.03% while expenses rose 0.22% on those same funds, according to The Wall Street Journal. So as rates rise, expect fund companies to absorb some of the increases.
- Short-term bond fund: Clark has advocated for ultra-short-term bonds as a good alternative to savings accounts during times of historically low interest rates. However, $10,000 invested in Vanguard's ultra-short bond fund for the last 12 months would've lost $134.12. These bond funds can lose money in the short term when interest rates rise.
- Series I savings bond: You can at least stay even with Series I savings bonds. You can read our briefing on those here. But Series I bonds reach maturity in 30 years. You must own them for a minimum of one year. So they're not very liquid. However, you can earn 9.6% on these bonds for the next six months.
What Is a U.S. Treasury Bond?
If you're holding cash in excess of your emergency fund (Clark says six months' worth of expenses is enough for most people), there's another option: U.S. Treasurys.
Want to earn a better rate on your cash than you're getting from all the other short-term and liquid options? You can buy U.S. Treasuries directly from the federal government at treasurydirect.gov.
"U.S. Treasury securities … are considered to be among the safest investments you can make, because all Treasury securities are backed by the full faith and credit of the U.S. government," writes FINRA.org.
The yield on three-month Treasury bills (T-bills) rose 0.46% in the first quarter.
3 Types of U.S. Treasury Securities
There are three types of Treasurys:
- Treasury bills. These are short-term. You can buy T-bills that mature in days, four weeks, 13 weeks, 26 weeks or 52 weeks.
- Treasury notes. These are intermediate-term. You can buy T-notes that mature in two, three, five, seven or 10 years.
- Treasury bonds. These are long-term. You can buy bonds that mature in 10-30 years.
You Can Buy Treasury Bonds
The government funds the U.S. budget deficit by borrowing from other countries, big Wall Street firms and wealthy individuals. However, most people don’t realize you can help fund the government’s budget deficits as a small saver and earn an interest rate that’s similar to those big-money entities.
The government sells Treasurys through public auctions. Competitive bidders specify the interest rate they want to get, but their order to buy will get accepted only if the rate they want isn’t higher than the price that results from the auction.
The public money tends to involve “non-competitive” bidding. You accept the rate determined by the auction. In turn, you’re guaranteed to get the amount that you want. (The minimum purchase per auction is $100 and the maximum is $5 million.)
It's possible to buy a new T-bill each month. You can also automatically reinvest the proceeds as your T-bills mature.
I’ll explain why buying U.S. Treasurys may be a great option to earn a better rate than you get saving with your bank or credit union while remaining more liquid and taking less risk than you would with other options.
How To Buy Treasury Bonds
Most people don't realize it, but you can buy T-bills yourself at treasurydirect.gov.
The first step is to open an account at TreasuryDirect. You'll need to provide your Social Security Number, your address, your bank account and routing number and your email address.
Then you'll need to find the auction dates. Non-competitive buyers can purchase before closing time on the day of the auction, which is typically 11 a.m. ET for T-bills.
“Buying Treasurys is so confusing to people and is really only for someone who is willing to do the work of following rates and doing a noncompetitive bid,” Clark says.
If you want to buy Treasury bonds and hold them for more than 3-5 years, Clark says, you'll be better served purchasing through a Vanguard treasury fund or exchange-traded fund (ETF).
You can also see the rates the government has paid recently. That way you have a good ballpark estimate of what you'll earn.
If you’re willing to navigate a somewhat complex and antiquated government website, you can buy Treasury bonds. At least right now, Treasury bonds are probably superior to savings accounts, money market accounts and ultra-short-term bond funds.
Don’t expect to get rich — or even beat current inflation — by buying Treasury bonds. But they can help you get a marginally better return on your cash in 2022 compared to your other options.
Questions about bonds or other money topics? Call Team Clark’s free Consumer Action Center and an experienced volunteer can help: 636-492-5275.
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