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  • Writer's pictureShernel Thielman

Maximizing Cash Returns Amid Rising Interest Rates

Parking cash is no longer a dead end. Eleven hikes in interest rates from the Federal Reserve (US Central Bank) have put savers back in the driver's seat.

The key, though, is to make the most of the cash you have laying around. Reaping the benefits of a plump 5%-plus yield on cash is only possible if you shop around for the best rate, switch to a financial institution that treats your cash better, and defeat the enemy known as inertia. Now's the time to move if you still have a pile of cash in a savings account paying below 1-2% in interest. You can get a lot more elsewhere.

High-Interest Rates Take More Than Intentions You must ask yourself, "Is having good intentions enough?"

"The answer is always, get off your butt," said Michael Green, chief strategist at Simplify Asset Management. Indeed, managing your cash is just as important as managing your stock portfolio. Proper cash management is critical to coping with financial emergencies, generating enough income to pay the bills (especially for retirees), and giving your idle cash a chance to grow as much as it can.

Even though the Fed in September kept its key short-term rate steady at a range of 5.25% to 5.5%, that doesn't mean you've missed the chance to make your cash work harder for you, says Matthew Goldberg, a consumer banking expert at Bankrate.

The starting point for short-term yields set by the Fed is at the highest level in more than 20 years.

Great Time For Savers "It's not too late," said Goldberg. "It's still a really great time for savers. It always pays to shop around and find the best yield and account for your needs." Especially at financial institutions where the deposit is (partly) insured. While market players won't rule out another Fed rate hike if inflation remains sticky and the economy remains resilient, they don't believe the Fed is in a rush to lower rates. There's only a 31% chance the Fed will lower rates by a quarter of a percentage point by June 2024, according to CME Group's FedWatch Tool.

And that's a good thing, as time deposit rates move in tandem with Fed policy moves. You're going to continue to be able to generate 5%-plus out of a money market until the Fed decides to move rates lower. The nice thing about (this part of the fixed-income market) is you're going to know exactly what return you're going to get. Terms should be chosen depending on the liquidity needs.

Mind Short-Term Needs Short-term money is cash you need yesterday. It's money you can tap quickly to pay for an unexpected home repair or condominium assessment, or to fund a pricey car maintenance due in a few months. This money could be deposited in a high-yield savings account or call account, which now sport yields close to 5%. Money needed in a year or more can easily be put in a 6-to-12-month time deposit.

One strategy is to ladder time deposits so one can get exposure to time deposits with different maturing dates. Investments carry inherent risks, and it's advisable to seek professional advice before making any financial decisions. Past performance does not guarantee future results, and market conditions can fluctuate, impacting investment values. This information is for educational purposes only and should not be considered as financial advice.

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