Where to Invest Your Cash Savings for Higher Yields
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today's episode 412. It's titled, Where to Invest Your Cash Savings for Higher Yields.

In 1990, I was attending university at the University of Cincinnati. LePereau and I were recently married, and I made one of my first investments. I invested in the Gratison Money Market Mutual Fund. Gratison and Company was a local broker in Cincinnati, and I felt like I was a genius in the sense that I could earn an 8% yield on this Money Market Mutual Fund.

Now, I was studying finance, but even so, I didn't really understand exactly what a money market mutual fund was. I just knew the yields were attractive and I had read about them, but I didn't have the true understanding that I do now of money market mutual funds, having done episodes on them, understand the legislation. A money market mutual fund is effectively private money in

In this case, Gratisan was taking in funds and investing those funds in short-term government securities and short-term commercial paper or commercial obligations. The Fed funds rate at that time was around 8%, and that was the business model. They invested the money, they charged a little bit of an expense ratio, I have no idea what it was, and then they paid that interest rate.

For much of the last decade, interest rates have been very, very low around the world. And so we didn't have to spend a whole lot of time concerning ourselves how our cash was invested. That's different today. Yields are much higher, inflation is higher, and so there's an opportunity cost for not putting our cash to work. In this episode, then, we want to look at some of the options out there

And that Gratison Money Market Mutual Fund example is important to me in that I realize that many listeners or even newer investors, while cash investing can seem simple, some of these products are actually kind of complicated. Some of the products really are confusing in terms of how they present themselves.

We want to start, though, with the most conservative, most liquid, in other words, ability to get your money in and out savings vehicles. And those are savings accounts at banks. I looked at the yields and some of the higher yielding savings accounts, such as Marcus Bank, Discover Bank. The yields that they're paying on cash deposits is 3%.

The benefit of putting money in a high-yield savings account at a bank is it's government guaranteed. If the bank goes bankrupt, there are insurance funds that are often sponsored by the government, in this case, an independent agency of the government in the U.S., FDIC, but that's an important component. Having that protection, now you have to keep the

The amount invested below the threshold, which in the U.S. is $250,000. Other nations will have different thresholds, but the easiest, safest way to invest cash is a higher-yielding savings account. Now, banks know that, and as a result, they're often fairly stingy in terms of what they're paying on their deposit accounts, particularly checking accounts. Whereas some banks, their business model is to actually differentiate themselves by having

higher yielding savings accounts. A little less liquid option, but still guaranteed by the government through insurance funds are certificates of deposits. You can do that at your local bank, but you can also purchase CDs through your brokerage firm. I looked at the

highest yielding CDs by maturity on Charles Schwab, where I have a brokerage account, and three months CDs, 4.1%, one year, 4.8%, and two years, 4.9%. Now, in this case, there's less liquidity. Often, if you exit a CD early, you have to pay a penalty in terms of a give up of some interest. But even the one month CD is 3.9%, so higher than the yield on the

those high-yield savings accounts. This past week, I got an email from a representative with TELUS savings app. I did an episode on TELUS about a year ago, plus episode 364 for members of Money for the Rest of Us Plus. At the time, I couldn't quite figure out what their business model was, but TELUS was promising to pay 10 or 20 times the rate of other high-yield savings accounts.

They were promising yields of 5% to 6%. And I was looking at the fine print where things that said all user deposits held in cash, not invested, are custodied by Chase Bank. Now, it did say TELUS is not a bank and customer deposits are not FDIC insured. But if you went on their website a year ago, it listed out the yield that TELUS was paying and then compared it to Marcus, Chase, and others. So it looked like a bank.

I couldn't figure out how the money was being invested. This was clearly private money where a private organization was promising to pay a higher yield, but with a bank, we know that the bank is taking in deposits and then it's making loans. I had to go to a blog post on TELUS to

to figure out what they were doing. And even that wasn't really clear. Somehow it was involved with real estate, providing loans to landlords. But I didn't feel real good about it because of the confusion on their website suggesting that this was a safe investment, when in reality we didn't know if it was safe because we weren't sure how the money was being invested and it appeared to be an unsecured liability of TELUS. We got an email from TELUS wanting to see if we were interested in...

having an affiliate relationship with TELUS where we would get a commission by steering listeners to TELUS. We clearly were not interested in that. But they also pointed out that they raised $16 million earlier this year with investments by Andreessen Horowitz, the renowned venture capitalist firm.

And there were other venture capitalists that invested in TELUS. Now, TELUS has been around for six years. I went back to their website and I was pleased and I let the rep at TELUS know that it's much more clear. They're upfront that they're investing in real estate and that these funds are not FDIC insured. And so some of the confusion on the website is not there, but we need to recognize when an entity is promising higher yields,

we need to understand their business model. Lending and paying interest on deposits is a spread business. They have to earn money somehow through lending or some other activity in order to maintain the deposits. Now, it sounds like their business model has changed a little bit in that now they're providing home loans, which presumably are secured, but again, as depositors at TELUS, your deposits are not secured. TELUS might have security on the loans that they've made on

on houses, but that doesn't necessarily flow through to the depositors, they still have an unsecured liability with TELUS without any transparency on how TELUS goes about their business. We don't know if they're losing money. Probably are, given their venture capital back, which is why depositing money at a bank is so powerful because it is government-guaranteed.

With money, we shouldn't have to ask whether we'll get the money back. It should be no questions asked. And that's what those guarantees do. But with something like TELUS and other apps that are out there, we have to do more due diligence, which makes it more of an investment, not just simply depositing cash to get additional yield.

Now, I've mentioned spread businesses that banks and other entities have to earn more through lending or other activities to pay their deposits. Now, there's a big exception to that, and I got an email from a listener a few weeks ago about this.

Central banks can lose as much money as they want. If we look at how, for example, the Federal Reserve, the U.S. central bank is set up, last year they paid the U.S. Treasury $109 billion in profits. And they have had close to $100 billion profit going back to 2012 that flowed to the government. The Federal Reserve was able to earn profits because they owned

own trillions of dollars of government bonds and other bonds that are earning interest. And they funded those bonds from an accounting perspective by creating deposits, which were essentially excess reserves that banks have on the Federal Reserve balance sheet. And then the Federal Reserve would pay interest on those reserves. Now, I'm not going to get into the accounting again. I've done it in other episodes, and it's pretty complicated.

But at its simplest, the Federal Reserve is paying interest on reserves that commercial banks have at the central bank. And then the Federal Reserve is earning interest on the bonds they own. And when the interest earned is greater than what they're paying on those deposits, on those reserves, then they earn a profit, which flows to the federal government. That has shifted. The Federal Reserve is now paying 3.9% on reserve balances that commercial banks hold at the Federal Reserve.

And many of those bonds that the government purchased in early 2021 have much lower yields. So now the Federal Reserve is having to pay more in interest than it's earning on its bonds. And it's lost $10 billion in the past year. Then it means it can't pass on profits. Now, does that flow through to its income statement? In other words, is the Federal Reserve insolvent?

potentially, but there's always accounting tricks when you're a central bank because central banks are the entity that issues the money. And so if you go to the Federal Reserve's balance sheet, they have on the liability side, there's a line item that says other liabilities and accrued dividends. And typically on a balance sheet, the liabilities are on the right side of the balance sheet and they're listed as a positive number. But in this case,

Other liabilities and accrued dividends is a negative number, negative $3.5 billion. And then the footnote says, includes the liability for earnings remittances due to the U.S. Treasury. In other words, the Federal Reserve doesn't pass on losses to the...

the U.S. Treasury. It just puts a line item under liabilities, makes it negative, so it's effectively a deferred asset that recognizes these are losses that we're going to need to recoup before we start paying profits to the U.S. Treasury.

Consequently, if you hear news reports, the Federal Reserve's losing money, they make up the money. The U.S. dollar is a Federal Reserve note. They'll be able to work out the accounting so that the Federal Reserve continues in its role of trying to keep inflation under control and flourishing.

full employment. And what it's doing now is it's raising short-term interest rates, including the Fed funds rate, which is at a target of 3.75 to 4%. And as part of that, they keep the interest rate they pay on the reserves in line with that Fed funds rate. Because the Fed funds rate is so high, that pulls up the yield on other cash investments, including CISOs,

savings accounts at banks, CDs, and even treasury notes and bills, which is another option. We can effectively not go to the bank. We can invest money directly with the U.S. government through Treasury Direct, or we can do it through our brokerage. We can buy bonds or notes. I bought a three-month treasury bill, for example, last July, and it matured

matured this month, and I earned some interest, much more than I was going to earn on a savings account. And then I rolled that bond into, or that bill, the proceeds into a treasury inflation protection security that was on auction in November. And there's a plus episode that we did a week or so ago that explains that process, but I did it through my broker Schwab. So we can invest directly with the US government or other, or if you live somewhere else, the

other nations. Now, those aren't government guaranteed, but the likelihood of default by the U.S. government on a three-month note, six-month note, when your treasury bill is incredibly small, they can just print the money and roll it over. So that's another option that's fairly liquid because then we can always sell those treasury bills if we need to. Before we continue, let me pause and share some words from this week's sponsors.

We're in an interesting period, though, if we look at what's known as the yield curve. And the yield curve measures interest rates over different time periods. So we have one month interest rates, six month, one year, two years. In this case, we're looking at the U.S. government bond treasury yield. And right now, the one-month T-bill is yielding 4.1%. Three months, 4.4%.

We go out one year, it's 4.76%. Two years is 4.46%. And then if we go out to 10 years, the 10-year treasury bond yield is 3.69%. That's down from 4.07% at the beginning of the month. What that means is, is that that yield curve, as we plot those interest rates on a graph, it's downward sloping because shorter-term interest rates are higher

than longer-term interest rates, and that's known as an inverted yield curve. In a more normal environment, we have an upward-sloping yield curve with longer-term interest rates higher than shorter-term interest rates. We have moved into an inverted yield curve situation, and in fact, if we compare the 10-year Treasury bond yield to the 2-year Treasury bond yield, that difference, that inversion, it's the greatest it's been since the early 1980s.

That's a recessionary sign. And the reason why goes to how longer-term interest rates are determined by the market. It's a function of inflation expectations. So if inflation expectations are high, longer-term interest rates will be higher. But a big component is expectations in the future for short-term interest rates. Market participants are analyzing expectations

every statement by the Federal Reserve and other central banks as to where they believe the Fed funds rate or the policy rate, short-term interest rates, are going to be a year from now, two years from now, three years from now. And if investors, bond investors, believe that those rates will be lower, that the Federal Reserve and other central banks will have to start cutting interest rates in order to stimulate the economy,

as opposed to raising the interest rates, which they're doing now to slow the economy, to reduce inflationary pressures, then we get an inverted yield curve because investors are expecting shorter-term interest rates looking out two, three, four years to be lower than they are today. And that is where we're at. We're at an inversion, and that's consistent with other economic trends that we monitor on Money for the Restless Plus.

in our monthly investment conditions report. Economic trends are now red or bearish based on survey data, other leading economic indicators, and this inverted yield curve is another example. Now, the inversion is much greater now than it was earlier this month. So we'll see.

Capital economics, for example, sees the probability of a recession based on some of their models three months ahead at around 25%, but in six months, close to 90%. And one of the inputs into their models, and other economic research firms are similar, they have different inputs, but yield curve inversion, downward sloping yield curves, is one of the inputs in many of those models.

Where that leaves us as investors, and we've had some discussions on this in the Money for the Restless Plus forums, is should an investor buy longer-term bonds? Not for income, because we just saw that we can get much higher income investing in three-month treasury bills or six months. The only reason to own longer-term bonds, let's say a 10-year government bond, is if the investor believes interest rates will fall and we'll get some capital appreciation in some type of

slowing economy or some type of recession scenario.

I'm less comfortable doing that because of the third element that contributes to interest rates. Remember, the first one was expectations for inflation. The second is expectation for where future short-term interest rates will be. And the third element is the term premium, which is additional compensation that investors require due to uncertainty with regards to inflation,

and central bank monetary policy. Historically, investors want additional yield to compensate for uncertainty. Right now, if we look at estimates of the term premium and the New York Federal Reserve Bank does those estimates, it's zero to negative, just slightly negative. In other words, investors are highly confident in the central bank and their view of, an investor's view of where future inflation will be.

I would be more comfortable going long government bonds, long duration bonds, if the term premium was positive. And I'm just not. But the point is, another option for investing cash savings is short-term government bonds.

A more convenient way to do that is to invest in a money market mutual fund that focuses on just government paper. For example, the Vanguard Cash Reserves Federal Money Market Fund, VMRXX, it has a yield of 3.7%.

Money market mutual funds, like the Gratisan Fund that I mentioned at the beginning of the episode, where I was getting an 8% yield, they take those funds and invest it in, in this case, if it's a federal money market mutual fund, it's going to be invested in short-term government bonds, or it's going to be invested with the Federal Reserve through some repurchase agreements.

The benefit of a money market mutual fund is you can just move money in and out. But with many brokerages, and certainly in the case with Schwab, you actually have to purchase the fund. The actual sweep vehicle that they just invest uninvested cash doesn't necessarily always get the highest yield. You actually have to go in and purchase the money market mutual fund. And then if you need the funds, then you need to sell that fund and then invest the proceeds.

With money market mutual funds, we need to be aware of the expense ratios to make sure it's low because especially with low yields, that expense ratio can eat up a large percentage of the returns.

Those then are the primary ways to invest cash savings. A high-yield savings account with a bank, a certificate of deposit through your local bank or through what's known as a brokered CD through your brokerage firm. We can own short-term government bonds directly through a brokerage or through, in the case of the U.S., a treasury direct account.

Or we can invest in a money market mutual funds. Those are the safest, most conservative ways to invest. And with our cash, we want safety. We want it to be money with no questions asked. That there's some protection there. That we don't have to do extensive due diligence to make sure we'll get our money back.

What shouldn't we do? One of the cash savings investments that we've talked about, I said investments, is crypto savings account. BlockFi was one that I participated in and sold back in May. I've mentioned it several times. BlockFi was taking in funds and then lending them out. They were paying upwards of 8% on those deposits and then clearly lending them out for more than that.

BlockFi was private money. It was money not guaranteed. And as we discussed in episode 410, deposits at crypto brokerage accounts are not protected if the brokerage goes bankrupt. They become unsecured creditors of the bankruptcy case. In episode 410, I mentioned that BlockFi had lent money to FTX, a

the crypto brokerage firm that went bankrupt a few weeks ago. That was the topic of episode 410. At the time, we weren't sure where BlockFi would end up, but early this week, BlockFi declared bankruptcy. Their top 10 creditors are owed $1.2 billion, and their customers, depositors that had money in these BlockFi savings accounts, $730 million outstanding.

Hopefully, you're not one of them. I've tried to be really clear about the risk of crypto savings account, that it's unsecured. And as I mentioned, I sold my position in May, and we've had a series of bankruptcies in this space.

This is not a cash savings vehicle. And I've done episodes for regular podcasts and plus episode on another cash savings vehicles. I did one two years ago on really risky savings vehicles. And I mentioned BlockFi in that episode as one of the options if you want to take more risk to get even higher yields. But there's a reason the yields are so high.

It's because it's unsecured money and typically we don't get transparency to actually do any type of credit analysis.

When you buy a bond issued by a corporation, there's the ability to analyze the company's financials. But with some of these new savings vehicles like BlockFi, like Telus, we don't get any information on the financial prospects of that particular entity. They always position as get a high yield. Look at this high yield. But they ignore the risk.

And they don't spell out the risk. You got to go to the very, very fine print to see that this is an unsecured liability of that company. And in the case of BlockFi, yet another example of extremely high risk savings vehicle that their customers will lose most of their assets, at least based on the preliminary information we're getting on the bankruptcy case.

Cash is low risk. It should be used for near-term expenses. Maybe if you're retired, your expenses over the next year. We shouldn't be taking big risk with our cash. We shouldn't have to do a lot of due diligence on where we put our cash. That's why it's best to have cash in areas where it's government guaranteed or in the case of like a money market mutual fund, there's a history of the central bank coming in and guaranteeing the funds.

or there's incredibly low risk of default if it's a government entity. Those are where we should put cash. We can put our investments in areas that are going to earn a return much higher than cash, recognize that our assets could be impaired. We'll need to do due diligence to understand how they go about making money. Can we explain it? Do we understand it? What's the potential upside, the downside, and all the questions that I outline in

In my book, Money for the Rest of Us, 10 Questions to Master Successful Investing. Be particularly aware of companies that confuse things by making it seem as if the money is like an FDIC-insured government-guaranteed deposit account, but it really isn't. And so you're getting these higher yields thinking it has the guarantees of cash when it definitely doesn't. So make sure you look at the fine print when looking at these various opportunities.

spend some time looking, do you have uninvested cash? I was looking at our health savings account where we've been depositing money the past few years and they were uninvested. And so we were able to move those funds into a brokerage account to start investing those because when we can earn 4% on cash, we should do it. The opportunity cost of not investing is much higher than it's been in a very long time. So look at your cash, make sure your

You're earning an attractive yield at a very low risk so that we can at least do a little bit to keep up with inflation. That's episode 412. Thanks for listening. I have enjoyed teaching you about investing on this podcast for over eight years now, but I also love to write. There's a benefit to writing over podcasting, and that's why I write a weekly email newsletter called The Insider's Guide.

In that newsletter, I can share charts, graphs, and other materials that can help you better understand investing. It's some of the best writing I do each week. I spend a couple of hours on that newsletter each week trying to make it helpful to you. If you're not on that list, please subscribe. Go to moneyfortherestofus.com to subscribe to the free Insider's Guide weekly newsletter.

Everything I've shared with you in this episode has been for general education. I've not considered your specific risk situation. I've not provided investment advice. This is simply general education on money, investing in the economy. Have a great week.