Keeping Cash on the Sidelines Can Cost You

We've had countless conversations with clients this year about the importance of getting their cash off the sidelines. Yes, money markets and high-yield savings accounts are paying great rates compared to just a year ago. This is great news for your short-term cash needs. But what about for longer-term cash?

One of the key differences between a high-yield savings account and a corporate bond is that a corporate bond allows you to lock-in the rate. While we never know the future, most Fed watchers expect the Fed to start cutting rates in 2024 or 2025. High-yield savings rates track the Fed funds rate, so when the Fed cuts, those great rates in high-yield accounts will go by the wayside.

Advisor Amanda ran an analysis to determine the true impact of keeping cash in a high-yield savings account instead of locking in a higher rate for longer with a corporate bond.

She took a starting point of $20,000 in a high-yield savings account paying 4.3%. If we assumed the rate stayed that high through all of 2024, reduced to 4% through 2025, then fell to 3% for all of 2026 and 2027, the gross returns (excluding tax) would be $3,070.

Now let's look at how your returns would look if you instead bought a corporate bond. A Toyota corporate bond for sale on Nov. 30, 2023 paid a coupon of 4.625%, with a purchase price of 99.122 of par, and maturity date of January 2028. Taking the same $20,000 and buying this bond, she assumes that the bond pays out a coupon twice per year, and that coupon is then reinvested in a money market account paying the same rates as the high yield account modeled in the first example. To simplify the math, she assumed the bond would mature at the end of 2027. The gross returns in this scenario would be $4,164.

You might see the different interest rates between the savings account and corporate bond, and think, what kind of difference can 0.3% really make. The answer is $1100 over four years. If you started with a $50,000 bond, the difference would be closer to $3000.

Would the 2027 version of you like an extra $1100 in their pocket? Help them out and put it there.