Treasury bills are a great option. A 3 month treasury pays over 5% and they are exempt from state income tax. There is not meaningful interest rate risk in a bond that matures in a few months, but you can still sell before maturity if you need the money. So in almost any scenario you can come up with, it’s better than the savings account.
The yield curve is inverted so short term treasuries are great right now. There’s little reason to have a typical savings or money market account or even a money market / bill fund when you can just put together a 3 month treasury ladder and get 5.25+%.
Longer term treasury bonds don’t seem so smart given the threat of sustained inflation. If you’re looking for longer term fixed income, maybe TIPS or Series I bonds are a good choice. I bond rates aren’t as great as they were a few years ago, but until end of this month you can take advantage of 5.27%, including a fixed rate component of 1.30% which is a 17 year high. You‘ve got a bond that will beat inflation by 1+% for 30 years. Not too bad.
Depending on your assests I would consider a short term bond (like 3 to 6 month). At least you should do better than your checking account. Long term bonds runs too many risks IMHO.
The Treasury sells savings bonds that are at 7.12% right now. It's not the same thing as a savings account and you can't put a million dollars in, but you can still get a good interest rate on smaller amounts.
Bonds can also fluctuate in value over the short term. If you hold a bond to maturity, you're guaranteed to get your principal (original investment) and interest back (unless the bond issuer goes bankrupt). But if you need to use that money in the meantime, you'll need to sell your bonds at whatever the current market price is, which may be higher or lower than what you paid to buy them. If you buy very short-term bonds, like 4-week Treasury bills, this risk is minimized.
I think that investments that have a stable value, such as bank accounts and money market funds, are the safest choice for cash reserves. They're also convenient, since you can transfer money easily between these accounts and your business checking account.
US Treasury Series I Savings bonds are currently paying 4.6% per year (their rate rises with inflation), income is tax exempt until redeemed, and can be redeemed at any time after 1 year.
I think you'd be better off going to the nearest bank with your $1,000 and buying an I bond. It's not a popular thing to do (only grandmas seem to like these things), but it's a pretty much slam dunk investment with zero risk.
If you are in the USA look into Series I savings bonds. They both earn interest and are protected from inflation. Minimum term ownership: 1 year. No early redemption penalty after 5 years. Earnings exempt from state and local taxes but subject to fed tax. The only drawback is you can only buy $10k of them per year per SSN. Much of my E-fund is I-bonds.
People can learn how to use Treasurydirect.gov instead of using their bank as a lousy bond broker. Inflation protected bonds, that you can buy only $10k a year of are some of the highest yielding risk free investments that exist. Banks should just make money off fees and hold short duration Treasury bills only.
Other institutions that have LPs should lend to businesses, students and home owners.
"If your funds are locked into treasuries or other assets that have a low current value relative..."
That's why it's a good idea to pay attention to the term of the bond. You can buy short term treasury funds with yield to maturity of around 30 days. These aren't capable of having low current value compared to final worth. You can also save a little extra money and be capable of taking the risk of a longer term.
US Treasury bonds are currently yielding more than 2.5% and are generally considered pretty safe. And even though a bank account is a terrible place to stash so much money, I think you'd find a better than average interest rate if you did have $2 million to stick in the bank.
I'd argue if you want the equivalent optionality of "cash" and you're buying today, you'd do better to just ladder into short-duration treasuries, or keep it in a high-yield savings account.
I-bonds are really only optimal if you plan on keeping medium-sized chunks of cash around in cold storage for time periods of longer than a year.
I thought about mentioning government bonds or term deposits, but I wanted to keep the post simple. My point is that the stock market isn't always the answer.
I don't know what interest rates on savings accounts look like in the US, but in the UK they're competitive with government bonds. Banks often use them as a loss-leader to sell more profitable products like credit cards and mortgages.
I'm curious to know what offers a better yield than a savings account with less risk than a stock or a bond. Even the US two year note has a negative real yield right now, so it's hard to see how to get an above-inflation return without taking significant risk. The five-year inflation-linked bond has a negligible yield, and means locking away your cash for a significant time [1].
At least at the moment, it would seemingly make more sense to invest in 1-year treasury bonds. The interest rate is higher, they are more liquid, they are more convenient to buy and sell, and they are taxed the same as I-bonds.
6-month T-bills are currently yielding 2.18%. They're pretty much the most secure investment you can possibly make. Vanguard, Schwab, and Fidelity all charge no commissions on treasuries, whether traded on the secondary market or new issues. Fidelity has the added bonus of having an "auto-roll" feature which will automatically invest maturing bonds into new ones of the same type, making for a completely hands-off investment.
If you're a US citizen, "I Series Savings Bonds" are fantastic emergency fund vehicles. You can cash them out instantly after holding them only one year, mine are paying just under 2% right now.
The $10k limit makes I-Bonds mostly suitable for parking emergency funds. If you’re saving up more money (for buying a house etc), a savings account is still the best bet. I’m in this position and the interest rates are frustrating, but everything else is very risky IMO.
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