Rising yields on cash deserve your interest

Most Americans have become accustomed to earning next to nothing on their cash. Like pedestrians staring at smartphones, it's an unfortunate reality that we reluctantly accept.

Low-yielding cash is a result of monetary stimulus and economic policies forged a decade ago during the Great Recession. The ability to borrow money cheaply is good for economic growth and helped clear a path for what became one of the longest economic expansions in history.

The side effect? Dollars held in checking, savings, and money market accounts would have earned almost as much sandwiched between your couch cushions.

But times have changed. Slow-but-steady rate hikes by the Federal Reserve and a strong U.S. economy helped boost the 10-year US Treasury yield up to 3.25 percent in October before falling in the months since. We have also seen a flattening of the yield curve, which means short-term assets like cash are relatively more attractive.

Several companies now offer online savings accounts with interest rates in the neighborhood of 2 percent per year. If you reside in a higher tax bracket, you can find money market funds that pay roughly 1.4 percent per year federal tax-free. Some of these options are FDIC insured. Some are not. It's important to check the details before investing.

If you don't know how much your cash is yielding, it's time to call your bank or investment adviser. Generally speaking, the larger the institution, the less likely it is your existing interest rate will be the most competitive. In many cases, there's probably a higher-yielding alternative.

All that said, even though a 2 percent yield could be eight to 10 times what you have been getting in recent years, it's still not an attractive long-term return. For investment purposes, cash should still be viewed as a holding tank.

Higher volatility in the stock market since September and better yields make cash more appealing, but it's still not a suitable replacement for growth assets like equities. Warren Buffett reminds us that when you consider inflation, cash remains a poor long-term investment.

"People who hold cash equivalents feel comfortable," Buffett said. "They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value."

With a little due diligence, you can now get "something" instead of "virtually nothing" on your cash holdings.

Ben Marks is chief investment officer at Marks Group Wealth Management in Minnetonka. He can be reached at ben.marks@marksgroup.com. Brett Angel is a senior wealth adviser at the firm.