How to evaluate cash savings options at banks, credit unions and brokerage firms. Why are yields on cash savings so much higher than a few years ago. How to tell if your bank or credit union is in experiencing financial difficulties.
In this episode you’ll learn:
- How to tell if a bank or credit union is having financial difficulties.
- Why are yields on short-term cash equivalents higher.
- What tools does the Federal Reserve have to keep short-term interest rates in line with its target.
- How to evaluate different options for investing cash.
Show Notes
Comparison of Average Savings, Deposits and Loan Rates at Credit Unions (CUs) and Banks – NCUA
Credit Union Industry Performance – Credit Union Journal
The Comprehensive Guide to Credit Union Performance Benchmarking – Callahan & Associates
Overnight Reverse Repurchase Agreement Facility – Federal Reserve
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Episode Summary
Many investors simply put their cash savings in a bank savings account and leave it there for years. However, on this episode of Money For the Rest of Us David explains why that option may no longer be the best idea. He explains why banks and credits unions can become financially unstable and proposes new investment options for your consideration. He also outlines why the Federal Reserve is setting a new interest rate floor and the tools the Fed has to keep short-term interest rates in line with its target. This episode is one not to be missed, so be sure to listen!
Banks and credit unions aren’t always the best options for your cash savings – here’s why
This episode was inspired by a Money For the Rest of Us listener who was shocked to learn that his cash savings were not earning any interest in his chosen Actor’s Federal Credit Union account. Why did his credit union stop paying interest on savings accounts? David explains that it may be because the credit union is financially unstable. This can occur if the credit union’s provision for loan losses quickly rises. For example, the Actor’s Federal Credit Union’s percent of total loans that were delinquent was 0.18% in 2013 and in 2017 it had risen to 4.9%. The amount of charged-off loans for the Actor’s Federal Credit Union is also substantially higher than the national average. These are the signs of a financially unstable union, and David explains the situation in detail on this episode.
The Federal Reserve is setting a new interest rate floor and using these tools to keep rates in line
David also offers a refresher on how the Federal Reserve sets short-term interest rates target and enforces those rates. Currently, the floor rate sits at 1.75-2%. After the September 2018 Federal Reserve meeting, rates are expected to rise to 2.25%. The Federal Reserve sets these targets because the rate influences longer-term interest rates, and they are always trying to strike a balance between a rate that allows the economy to continue to expand without causing inflation. To keep this balance, the Federal Reserve leverages tools such as paying interest on bank reserves and utilizing overnight reversed repurchased agreements.
Ask yourself these questions before moving your savings into a new investment option
Investors should ask the following questions before immediately moving their cash savings into new investment options. They include:
- What is the rate the new institution is paying?
- Will the increased percentage make up for the hassle?
- What is the minimum they require?
- Are they FDIC insured?
Consider these options for investing your cash savings
The options for cash savings are multiple and varied. After considering a few brief questions, investors can begin to consider multiple new options. David outlines the following all on this episode of Money For the Rest of Us.
- Bank-sponsored savings accounts
- Money market mutual funds
- Exchange traded funds that invest in ultra short term bonds.
- Municipal money market mutual funds and municipal ultra short term bond ETFs.
Episode Chronology
[0:10] All about banks, credit unions, and the pros and cons of cash savings[4:47] How can banks and credit unions become financially unstable?
[14:25] The Federal Reserve is setting a new short term interest rate target
[15:55] What tools does the Federal Reserve have to keep short-term interest rates in line with its target?
[19:20] There are other options for investing your cash savings
[25:49] Is it really worth pursuing multiple investing options for your cash savings?
