interest rates

Maximizing Your Savings: A Guide to Smart Cash Management in the Current Financial Landscape

Cash Savings

In today’s financial climate, understanding where to keep your hard-earned cash can make a notable difference in your wealth-building journey. While stockpiling cash reserves in traditional checking and savings accounts has been the norm, currently elevated interest rates invite us to consider alternative savings options.

The State of Checking Accounts

According to the FDIC, the national average interest rate for checking accounts is a mere 0.07%. However, low rates on checking accounts aren’t unusual.

Rates have remained relatively low over the years, irrespective of fluctuations in the broader economic environment. That’s because banks traditionally profit from the differential between the low interest they pay on deposits and the higher rates they charge on loans.

Besides profit margins, factors like operational costs, cash reserve requirements, and the low-risk nature and accessibility of checking accounts contribute to their lower interest rates. Fortunately, there are other places to store your cash.

The Appeal of High-Yield Savings Accounts

Unlike traditional checking accounts, High-Yield Savings Accounts (HYSAs) at online banks are currently offering more generous yields—on average, between 4.35% and 5.15%. The absence of traditional brick-and-mortar expenses allows these institutions to offer higher rates, providing a more lucrative home for your cash savings.

Money Market Mutual Funds: A Closer Look

Money Market Mutual Funds (MMMFs) offer a blend of accessibility and enhanced interest rates, currently between 5% and 5.30%. However, while MMMFs allow for the swift movement of funds, it’s crucial to remember that they aren’t FDIC insured.

Rather, these accounts are often protected by SIPC coverage up to $500,000, including a $250,000 limit for cash, within a SIPC-member brokerage firm. Yet, it’s important to note that this protection doesn’t cover market losses, underscoring the need to consider the inherent risks of market-based investments.

For tax-sensitive savers, municipal MMMFs can provide a route to tax-exempt income, depending on where you reside.

Certificates of Deposit: Locking in Rates

Certificates of Deposit (CDs) present an opportunity to secure a fixed interest rate, with 1-year CDs currently offering between 4.76% and 5.67%. While CDs lack the liquidity of HYSAs and MMMFs, they shield against declining rates, ensuring a steady return for the deposit term.

Making Your Cash Savings Work for You

Let’s put this into perspective. Suppose you have $20,000 in a checking account, earning 0.07%, or $140 annually. Moving this to a savings account yielding 5% would make your potential earnings $1,000 a year.

After taxes, assuming a 24% tax bracket, that’s $760 net compared to $106.40 from the checking account. The difference is clear.

To maximize your earnings on cash, staying current with the most competitive rates is key. Trusted financial websites like Bankrate.com, NerdWallet.com, and Investopedia.com offer valuable comparisons and insights. In addition, checking the FDIC or SIPC status of the institution where you plan to deposit funds is essential.

Remember, your cash doesn’t have to sit idle. By being proactive and informed, you can make strategic choices that align with your financial goals and comfort level with risk.

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Is a U.S. Recession Looming?

Is a Recession Looming?

Since mid-2022, concerns about an impending recession in the United States have been making headlines. However, despite various warning signs and indicators, the U.S. economy has shown resilience over the past nine months.

So, what’s happening? In this blog post, we’ll explore the factors that have fueled recession concerns, discuss the current state of the U.S. economy, and examine whether investors should be worried about a potential recession.

Understanding a Recession

Typically defined as two consecutive quarters of contracting gross domestic product (GDP), a recession indicates a significant decline in economic activity. By this definition, the U.S. economy is not heading for a recession, as GDP grew by 1.3% in the first quarter of 2023.

The National Bureau of Economic Research (NBER) is responsible for officially declaring recessions. Its definition is somewhat vague but emphasizes significant and sustained decline in economic activity across various sectors.

Mixed Economic Signals and Concerns

Mixed economic data has economists divided on whether a recession is imminent.

The Federal Reserve’s projection of low GDP growth for 2023 and successive interest rate hikes have raised concerns about a potential economic decline. A minor banking crisis, resulting in the failures of some financial institutions, also fueled worries.

Moreover, inflation has remained above the Fed’s target, prompting rate hikes that affect corporate investments and consumer loans. As a result, analysts expect negative earnings growth for S&P 500 companies, while a tightened credit market has reduced lending to corporations and consumers.

Meanwhile, the yield curve has been inverted since the middle of 2022, as the yield on 2-year U.S. Treasury notes has exceeded that of 10-year Treasury notes. An inverted yield curve can be problematic as it frequently appears before an economic downturn.

And the New York Federal Reserve’s recession probability indicator, which uses the yield curve’s slope to predict U.S. recessions, suggests a 68.2% chance of a recession in the next 12 months—its highest reading in four decades.

Yet while some indicators have sparked concerns, the current strength of the U.S. labor market and economic activity has divided economists on the inevitability of a recession. In addition, positive earnings, as well as guidance from retailers like Walmart, indicate that consumer spending remains strong.

Though slightly below estimates, retail sales grew for the first time since January. The resilience of the U.S. economy has surprised experts, suggesting that a recession may be farther in the future than expected.

What Does a Possible Recession Mean for Investors?

While concerns about a U.S. recession persist, the economy’s current state and the labor market’s ongoing strength suggest that an immediate downturn may not be inevitable. However, in the event of a recession in the second half of 2023 or early 2024, investors need not panic. Historically, recessions have been relatively short-lived, with an average duration of around 10 months.

Economic downturns also tend to present attractive opportunities for long-term investors, with the S&P 500 generating an average return of 40% in the 12 months following the market’s low point during a recession. In addition, some stocks, such as Target, Walmart, and Home Depot, have historically performed well during recessions.

Thus, despite the potential risks, investors should take a long-term perspective and consider the historical patterns of economic cycles. Recessions, although challenging, have often paved the way for favorable investment opportunities.

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