You can earn more interest on your cash than any time in nearly 25 years. More than 5% in some cases. This new era raises some important questions.

First, you might notice you're not getting these high interest rates on your checking or savings account. So how do you actually earn these high rates on your cash?

Second, how do high yield savings accounts compare to treasury bills?

And lastly, with cash paying such a high interest rate, is there any reason to own bonds?

Well, I'm going to answer all of these questions in this video in order to help you get the most out of your money.

Why You Aren’t Earning A Good Interest Rate

If you're not getting a high interest rate in your savings account, and as we sit today, I'd say anything less than 4% would qualify as too low, then it's probably because your account is held at a brick and mortar bank.

That includes the national names like Bank of America, Wells Fargo, etc., but also regional banks and credit unions.

Bank of America's posted savings account rates from their website are essentially zero. Their platinum honors tier with a higher APY is paying a measly 0.04% (as of 5/16/24). Honestly, it feels criminal.

But the story is the same for most banks. If you want a higher rate, you have to know where to look. And the first place to look is a high yield savings account.

What Are High Yield Savings Accounts?

High yield savings accounts work similarly to regular savings accounts, but they're typically offered by online-only banks.

These banks have less overhead compared to brick and mortar banks, and so they can afford to pay higher interest rates. Otherwise, these accounts are nearly identical to the brick and mortar savings accounts.

They should still be FDIC-insured, typically with no extra fees, and they provide easy access to your money whenever you want it, just like a regular savings account.

There are tons of options for these accounts. Just type “high-yield savings account” into Google, and you'll see plenty of options.

The main advantage with these accounts is the high interest rate and convenience. You can transfer money quickly and easily between your high yield savings account and your regular checking account.

What Are Treasury Bills?

Another option for earning more on your cash is Treasury bills, otherwise known as T-bills.

T-bills are essentially short-term loans you make to the U.S. government. The interest rate you earn on T-bills is usually higher than what you can earn on high-yield savings accounts. Plus, the interest earned is exempt from state and local income tax, which can be really valuable, especially for residents of states with high state income tax.

T-bills are considered virtually risk-free, just like high-yield savings accounts, since they're backed by the U.S. government, which can print its own money.

You can buy T-bills directly from the government through a website called Treasury Direct, or you can access them indirectly through a mutual fund or ETF in a regular brokerage account.

A lot of money market funds are invested either wholly or partially in T-bills, so I'm going to group them into this category as well.

The downside of T-bills is that they're slightly less convenient than high yield savings accounts. If you hold T-bills through a brokerage account, you'll need to sell the ETF or mutual fund and wait for that cash to settle before transferring it to your bank account. This could add a few extra days before the money is available in your checking account compared to a high yield savings account.

Comparing High-Yield Savings vs. T-Bills

If you're trying to decide between a high yield savings account and T-bills, the choice really depends on whether the extra return from T-bills is worth the slight inconvenience.

If quick and easy access is a priority, then a high yield savings account might be your best bet.

If you can tolerate a bit of inconvenience for a higher return and better tax treatment, then T-bills could be more advantageous.

Is There Any Reason to Own Bonds?

How do bonds fit into this picture? If I can earn 5% on cash, then is there any reason to own bonds which can be riskier and may actually earn a lower interest rate?

I think that there's still a case for bonds and I'm going to explain why, but first let's clarify what I'm talking about when I say bonds.

What are Bonds?

Bonds are loans made to governments or companies and they can vary in length from less than a year all the way to 20+ years.

It's crucial to understand how changes in interest rates impact bonds.

If you own a bond and interest rates go up, then the price of the bond you own will go down. Why? Because new bonds offer higher rates, so to entice somebody to buy your bond, you'd have to offer a lower price.

Conversely, if interest rates drop, all else being equal, then the price of the bond you already own will increase. So there's an inverse relationship between changes in interest rates and the price of the bonds already in circulation.

This relationship explains why bonds had really terrible returns in 2022 when interest rates rose significantly.

Why Are T-Bills Paying More Than Bonds?

As I alluded to earlier, T-bills are paying a higher interest rate right now compared to longer term bonds such as the 10-year Treasury bond. So why would I own those bonds?

To answer that question, it's helpful to know why T-bills are paying a higher rate right now than bonds. This situation is called an inverted yield curve and it happens when the market is expecting rates to fall in the near future.

Here's a picture of the yield curve currently and on the y-axis we have the current interest rate and on the x-axis we have the length of the bond. And up here we can see the rate on short-term loans, otherwise known as T-bills, which is higher than longer-term loans like the 10-year Treasury.

If rates do in fact come down, it introduces something called reinvestment risk. Reinvestment risk refers to the possibility that you'll have to reinvest at lower rates when your investment matures.

For example, if you hold a one-year Treasury bill at 5% and rates drop to 4% over the course of that one year, then when your Treasury bill matures and you go to invest that money in another Treasury bill, you'll only be earning 4%.

The Case For Still Owning Bonds

Longer-term bonds can help mitigate that reinvestment risk. If you lock in a higher interest rate over a longer time period, then you won't have to worry about reinvesting at lower rates if rates fall, at least until your longer-term bond matures. This can provide more stability in your investment returns over time.

It's possible that rates continue to increase, and in that case we would expect T-bills to do better than bonds because longer-term bonds are more sensitive to changes in interest rates.

But we just don't know what the future holds, so the prudent strategy, in my opinion, is to invest according to your time horizon.

For short-term cash needs, high-yield savings accounts or T-bills are a great place to be right now.

However, for longer-term investments such as retirement portfolios, you shouldn't avoid bonds. Diversifying with bonds helps manage reinvestment risk and captures the price appreciation if and when interest rates fall.

Navigating the current landscape of higher interest rates requires a strategic approach in order to maximize your returns. Ultimately, the time-tested strategy of a diversified portfolio appropriate for your time horizon still holds true.

Need help crafting that diversified portfolio? We can help. Schedule a free consultation using the link below.