Page 28 - Bulletin Vol 26 No 1 - Jan-April 2021 - FINAL

Article | Finance

Savings Options in a Near Zero Interest Rate

By Christopher N. Congema, CFP
Landmark Wealth Management

Not long into the 2008 financial crisis, the Federal Reserve, among other policy responses, dropped short-
term interest rates to zero. After nearly a decade of anemic economic growth, we finally started to see
enough economic activity that the Fed began increasing rates. Unfortunately, Covid lockdowns caused a se-
vere contraction to GD, the Fed was forced to reduce rates back to zero, resulting once again in limited sav-
ings options for the average American.

A savings account is never a great long-term investment option. However, it is imperative that all investors
maintain some degree of short-term liquidity for emergencies. In general, it is a good idea to have at least six
months to one year of an emergency fund.

Historically, money market accounts offered savings rates with higher yields than a typical savings ac-
count. Unfortunately, in the current environment most money markets offer nominal interest rates, not
much better than a typical savings account. One option that offers some improvement can be found in the
online banking arena. The lack of “brick and mortar” costs associated with online banks often lead to more
competitive interest rates. Traditional savings and money market accounts are useful as they allow for day-
to-day liquidity. It is also important to understand that not all money markets are FDIC insured. Since a
money market is technically a mutual fund, it is possible for the fund to “break the buck” and pay back less
than $1 per share. While this is very rare, it did happen in 2008.

CDs are a viable option as a short-term savings vehicle. If you have no need to spend cash, other than for an
unforeseen emergency, a CD may make sense. If you need to break the CD, typically the only penalty in-
curred is the loss of the interest the CD would have earned. As long as you stay within FDIC limits, there is
generally no risk to your principal.

An ultra-short term bond fund comprised of very-high credit quality is not a savings account. These funds
come with very nominal downside risk for the investor who does not have any known short-term needs. It’s
important to pay close attention to credit quality, as a short-term bond fund in an extreme market downturn
can see noticeable short-term losses. While these declines are unlikely to look anything like the declines seen
in equity markets, they can be impactful. At the height of the market panic in late March of 2020 it was not
uncommon to see a 5%-10% decline in short-term funds that took greater credit risk. One clear indicator is
the yield of a fund. If the yield is noticeably greater, then more than likely its worth looking closer at the
credit rating of the issuers the fund is buying. In contrast, most short-term funds of very high-quality debt
actually appreciated as the markets plummeted in March of 2020.

Many of us have had local bank tellers notice a large cash position and encouraged us to speak to the local
investment professional at the bank. One such option they will propose is what is known as a Single Premium
Deferred Annuity (SPDA). The SPDA is an insurance contract that functions much like a CD with no fluctua-
tions to your investment principal. They are not insured by the FDIC, but rather backed by the

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