Reconsider the role of cash in your financial plan

Reconsider the role of cash in your financial plan
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CDs and short-duration bonds may offer higher yields but more risk than savings accounts.

While stock markets have rallied in recent years and helped investment account balances, money in savings accounts has not kept up. Low rates have meant meager interest for cash savings—nationally the average savings account paid just 0.60% interest in early 2017.

The good news for savers is that interest rates have moved up in recent months. The bad news is that they haven’t moved up a lot, at least not when you consider investments that are safe enough to be considered as a home for your cash. But even if you can’t earn a lot on your cash, that doesn’t mean you can’t do significantly better.

“There are a range of income options that can offer a meaningful increase in income; you could potentially increase the yield on your savings by a significant amount,” says Richard Carter, a vice president of fixed-income products and services at Fidelity. “The key is to understand what you need the money for, and then find an option that makes sense for your situation.”

Before you look for higher-yielding options, take a second to reconsider the role of your cash in your financial plan. Once you have decided what kind of savings vehicle might make sense for you, consider your options.

High-yield savings accounts, CDs, money markets funds, and short-duration bonds all have the potential to help you generate more income from your cash. But what about higher-yielding options? Longer-dated bonds, high-yield bonds, preferred and convertible securities, or even dividend-paying stocks all may offer higher yields than these options. But beware of chasing yield—the risks of these higher-yielding options is such that they should not be considered as a way to improve the yield on your cash.

Read the full version of this article on Fidelity Viewpoints, which includes more information on CDsindividual bonds, ETFs, and funds.

This article was produced by Fidelity and not by the Quartz editorial staff.

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