Cash Hoarders, High Interest Rates Offer Investing Opportunities

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In an era where cash is often deemed the least attractive asset due to low yields and inflationary pressures, an unexpected twist in the financial landscape is changing the perception. Generations have been advised against sitting on cash, with the returns from even a high-yield savings account of 7% paling in comparison to the potential gains from real estate or the stock market. However, in light of recent economic developments, financial advisor Heather Ettinger suggests that holding onto cash, at least for a short period, may not be the financial faux pas it once was.

With inflation rates soaring to an average of 8% in 2022, savers are faced with the harsh reality that money stored at a 4% rate over the same time period results in a loss of purchasing power. However, this scenario is being challenged by the Federal Reserve’s multiple rate hikes implemented to combat inflation over the past year. The federal funds target rate range is now between 5.25% and 5.50%. While this increase spells trouble for credit card users, savers can potentially earn more on interest, provided they choose a savings account with an optimal yield.


The New Financial Climate: Why Sitting on Cash Isn’t Always a Bad Idea

Traditionally, holding onto cash has been viewed as financially imprudent, especially considering the paltry returns from even the highest yielding savings accounts compared to more lucrative investments like property flipping or stock market investing. Moreover, inflation, which reached an average of 8% in 2022, can significantly erode the purchasing power of savings. However, according to financial advisor Heather Ettinger, the current economic climate presents a unique scenario where holding cash for short periods may not be as detrimental as previously perceived.

The Federal Reserve’s Impact on Cash Returns

Following a series of rate hikes by the Federal Reserve to combat inflation, the federal funds target rate range now stands at between 5.25% and 5.50%. While this situation may spell trouble for those reliant on credit cards, it presents an opportunity for those with cash in their bank accounts. By selecting a savings account with the best yield, these individuals can earn more interest on their cash than before.

The Potential Benefits of Holding Cash

Michael Halloran, who leads partnerships and business development at financial advisory firm MaxMyInterest, revealed that a person with $1.5 million in savings could earn up to $3,000 annually and $300,000 over a decade in interest. In combination with other investment strategies, this could result in a substantial cash reserve, without exposing oneself to the risks associated with a stabilizing real estate market or volatile stocks.

Making Conscious Decisions About Cash

For those with smaller cash reserves, holding cash can provide the flexibility required during an emergency. These individuals, however, should strive to maximize their wealth by making conscious decisions about their cash holdings. Rather than leaving money in a main checking account, it may be more beneficial to explore different savings accounts to identify the one offering the best yield at the lowest cost. Banks such as Citizens and Barclays offer accounts with a return rate close to 5%.

Takeaways

Given the current economic conditions and the Federal Reserve’s response to inflation, holding cash may not be as financially detrimental as previously thought. Whether you have a large or small cash reserve, making deliberate decisions about where to hold your money can help maximize your wealth. However, this shouldn’t be seen as a one-size-fits-all solution. Individual financial situations and goals will always influence the best course of action. As Tim Harrington, founder of Longview Financial Advisors, aptly put it, "You should shop around."

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