Here’s Where to Park Your Cash for Higher Yields
February 06, 2019
Cash doesn’t have to just sit in your bank or brokerage accounts—it can, and should, be working for you just like the rest of your investments, paying you even while it’s parked.
Here are some of the best alternatives to get paid well on your cash.
Start with Uncle Sam
One of the easiest means of parking cash can be found in very short-term US Treasuries. Treasuries are available through most banks or any brokerage company with nominal fees or commissions and are one of the safest parking places for cash. In fact, this is usually where banks and insurance companies put their cash to work.
The yield curve is pretty flat, which means that yields are pretty similar from the 2-year out to longer-term maturities. But the 2-year, at 2.50%, represents the bulk of the yield offered in the Treasury market. Moreover, as you hold the 2-year, each and every day that goes by means that the maturity becomes ever shorter—further dropping the price-to-yield risk for the Treasury.
And there’s a tax benefit: While interest is taxed on income from Treasuries, it cannot be taxed by state and local authorities. This is even more important if you’re living in a higher-taxed state.
Rate the Rates
Beyond Treasuries, there are plenty of savings accounts and money market accounts that you can open and easily transfer cash to and from your regular banks and brokerage company accounts.
But rather than taking the time to search countless bank, brokerage and other financial websites—there’s a one-stop solution found at BankRate.com. At this website, you can easily scan numerous offerings without charge or fees for savings, money market and certificates of deposit (CD) rates around the nation, complete with contact information and other evaluations.
This allows you to get a quick handle on where rates are for various types of accounts around the country. And it also allows you to see minimum account sizes and other characteristics for each cash-parking product or service.
Let Them do the Work
With the advent of financial technology (fintech), there are many recent startups that have come to the financial market offering a wider array of financial products and services for individuals, institutions and businesses.
One of these fintech companies has developed a brokerage-style business for cash deposits. The American Deposit Management Company (AMDC, private) takes in your cash and, depending on your requests for liquidity and maturities, it will comingle the deposits to obtain yields that can be higher than for smaller individual sums.
Another fintech approach is offered by MaxMyInterest. Instead of taking on the deposits, it provides the ability for individual investors to link their own bank and financial accounts to their account at MaxMyInterest. It then will track the rates and yields offered across your accounts and alert you to the best yields. It can even transfer cash to the highest yielding of your accounts for the best returns on your deposited cash.
Note that both AMDC and MaxMyInterest charge fees based on the amount of cash that they are working with for each account.
For many higher tax-bracket investors, state and local tax rates can be increasingly onerous. And of course, if you can cut out Federal tax liability, your net return will be even higher.
This is where tax-free money market funds come in. Vanguard and Fidelity offer many individual state tax-free money market funds that are open-ended, meaning that you can buy in or out each day at the ending net asset values of the funds.
These funds invest in very short-term municipal bonds that often have just days or weeks to final maturities. This translates to very little to nearly no interest-rate risk in these funds and the ease of being able to move money into and out of the funds on a day-by-day basis.
In addition, if you are at risk of being caught in the alternative minimum tax (AMT), these and other fund companies also offer AMT tax-free municipal money market funds.
For a general national tax-free money market fund, look the JP Morgan Tax Free Money Market Fund (JTFXX). This fund has an average day-to-maturity count in the fund at 14 days—making for a very stable fund. The tax-free yield is currently running around 1.27%, but on an after-tax basis for higher tax-bracket investors, the fund’s taxable equivalent is 2.02%.