Wealthy Banking Clients Are Moving Money to Treasurys and Money Market Funds: Should You?
With interest rates on the rise, wealthy Americans are looking for new ways to make their money grow faster, and many have decided that traditional bank accounts are no longer cutting it.
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The Wall Street Journal reported that Bank of America’s wealthiest clients have been moving their money out of deposit accounts — deposits at the bank’s wealth unit fell 17% in 2022. Meanwhile, Wells Fargo’s wealth-management deposits dropped by 28% and at JPMorgan Chase, deposits fell 17%.
So where is this money going? High-net-worth individuals are moving their funds to other vehicles that offer higher returns, such as money-market funds and Treasury notes, WSJ reported.
While this may be a robust strategy for the wealthy, is this something everyone should be doing? GOBankingRates spoke to financial experts to find out.
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What works for the wealthy might not necessarily work for you in this case; it really depends on your individual situation.
“Savers should take a variety of factors into account, like your stage of life, risk tolerance and what savings products are accessible to you,” said Ben McLaughlin, president of the savings platform SaveBetter. “Treasurys and savings accounts are some of the safest investments, as they are backed by the U.S. government, up to the insured limits for savings accounts. The principal on money market mutual funds aren’t insured, but they are still quite safe and liquid investments when you look at the risk spectrum.”
Ryan P. Johnson, CFA, CFP, managing director of investments at Buckingham Advisors, generally does recommend moving extra cash from savings accounts to Treasurys or money market funds. “We suggest that anyone with more than a few thousand dollars of savings should look for higher sources of return on their cash,” he said.
Let’s take a closer look at why you may or may not want to move your money from a savings account into the vehicles preferred by the rich.
Pros and Cons of Treasurys
Treasury notes, also known as T-bills, are long-term debt securities that typically mature between 20 and 30 years and pay a fixed interest every six months. When considering putting money into Treasurys, it’s important to have an understanding of the pros and cons.
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They’re safe and your earnings are guaranteed: “If savers are looking for safety and want to lock in a guaranteed rate, Treasurys can be an attractive option,” McLaughlin said.
Interest grows tax-free: “They provide the added benefit of being exempt from state and local taxes for the interest earned,” McLaughlin said.
Money in this account is not liquid: “Generally speaking, if a consumer is looking for a safe vehicle to park their cash, earn a good return and be able to pull it out whenever they want, savings accounts are still the best option out there, especially if the Fed continues to raise rates,” McLaughlin said. “However, if a consumer does not mind locking up their funds for a set period of time to get a guaranteed interest rate, then Treasurys may be the best option currently.”
It’s harder to get a Treasury note than to open a savings account: “Treasury notes can be more difficult to purchase, as you often have to go through an intermediary or the secondary market, unless you buy them at auction through the U.S. Treasury directly,” McLaughlin said. “Setting up a savings account directly with your preferred institution or platform can be more straightforward.”
You’re locked into a rate for the long term: If rates continue to rise, you could miss out on potential future earnings. “Savers might miss out on other opportunities to get better returns if they are locked into a 10-year note, for example,” McLaughlin said.
Pros and Cons of Money Market Funds
Money market funds are mutual fund investments that are pooled together into short-term securities. They tend to be high quality and highly liquid. Before purchasing a money market fund, take a look at the potential benefits and disadvantages.
They are low-risk and liquid: “Money market funds allow you to invest your money in low-risk vehicles while having no entry or exit charges, and offer high liquidity, as the entities being bought and sold are in high demand,” said David Crittendon, EVP and director at the Private Bank at UMB Bank.
They offer higher returns than a savings account: “Generally, the interest rate that you receive is better than what you could secure from a savings account that gives minimal returns,” said Jody D’Agostini, a financial professional with Equitable Advisors. “In these times of high inflation, parking your money in cash or cash-like entities such as a savings account doesn’t keep up with the prices of goods and services. Money market funds are good for investments that are at least four figures or more, so long as you can maintain the minimums required.”
They’re useful for short-term savings: “Money market funds can help fund short-term goals or serve as an emergency fund,” D’Agostini said. “They are good places to park money for a wedding, trip, vacation or other large expense. It might also be a good place for holding estimated taxes and to fund your IRA.”
Rates fluctuate: “Something to keep in mind is that money market mutual funds can offer high yields, but they aren’t guaranteed and they can fluctuate,” McLaughlin said.
Money market funds may charge fees: “They typically charge a management fee, which can eat into your earnings,” McLaughlin said.
They’re not great for long-term savings: “This avenue should be thought of as a short-term option for your cash, as they are typically not insured by the Federal Deposit Insurance Corporation (FDIC), offer no capital appreciation and overall returns from money market funds are dependent on interest rates,” Crittendon said.
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