About Low-Risk Cash Management

When it comes to investing and managing your money, one of the most basic concepts is the relationship between risk and return. In a mature and open market, higher returns usually come with higher risk. If you want lower risk, your return generally will not be very high. Of course, returns are not absolute and will fluctuate with the market to some extent. But if you see something advertising an annual interest rate above 5% while also claiming to guarantee low risk, be especially careful. You may be looking at the interest, while they may be looking at your principal.

The US is currently in a somewhat unusual environment: inflation is high and stocks are volatile, while interest rates are also elevated. For people who are more risk-averse, choosing a few suitable low-risk ways to park extra cash can be a good option. It is also best to allocate a reasonable mix of high-risk and low-risk assets in your financial plan so you can maintain both flexibility and returns. So below, we’ll introduce several low-risk cash management options in the US:

About Savings Accounts (Saving Account)

Most people are already familiar with Saving Account products. When you open a bank account, you usually start with a Checking Account. At the same time, you can also open a linked Saving Account and move over money you do not need for everyday use so it can earn some interest. Since this is just a standard bank account product, you simply need to open the account.

Here is a general overview of Saving Account products:

  • Yield: 0.01%-2.5%
  • Risk: Basically none (FDIC protection up to $250,000)
  • Flexibility: High (funds can be accessed anytime)
  • Payout frequency: Once per month
  • Fees: Monthly fee (usually none, or it can be waived)
  • Taxes: Tax on interest income

Yield

Since savings accounts are something nearly every bank offers, the APY is usually not very impressive. The average annual interest rate across all US banks is only 0.16%—yes, it really is that low. That said, rates can vary significantly from bank to bank. The table below shows rates from some banks as of August 18, 2022. As you can see, the giant banks—Chase, BofA, US Bank, and Wells Fargo—were all offering a tiny 0.01%. Most of the banks near the top of the list either have very few branches or are purely online banks.

Since the rate table is already listed above, you can simply choose a bank you like based on the current rate and open a saving account there. For a Saving account like this, you do not really need to care whether the bank has physical branches, because if needed, you can always move the money to a checking account at another bank and then use it for transfers or writing checks. I recommend the following savings accounts—they offer solid rates and are generally well reviewed. Of course, for banks that offer account opening bonuses, it may be better to wait until there is a good bonus available and then open one to keep long term.

One thing to note is that Saving account rates can change at any time, since they are tied to the Fed’s rate environment. They are not locked in. If the rate drops substantially, you can move your money elsewhere and switch to another way of saving.

Risk

First, funds at the vast majority of banks are protected by the FDIC, so loss of principal is generally not a concern. The one important point to remember is that the maximum protection is $250,000 per account category, so just make sure you stay within that limit.

Flexibility

Saving is a very flexible way to manage your money. You can freely move money from your Saving account to other checking accounts at any time. That makes it a good place to keep emergency funds that may need to be used on short notice. Interest on Saving accounts is generally paid monthly, so you simply receive interest based on your balance each month.

However, because this is a savings account product offered by a bank, the funds in saving cannot be used for secondary market trading.

Fees

In general, several of the higher-yield online banks do not charge monthly fees and do not require a minimum deposit. Of course, when opening an account, you should still pay attention to whether the bank has monthly fees or minimum balance requirements. Otherwise, you may earn very little interest and lose it all to fees. My general suggestion is to choose a Checking account with a bank that has local branches, and choose a Saving account with a high rate and no monthly fee.

For example, Chase Saving has a $5 monthly fee, but it can be waived if you meet any one of the following requirements (and I assume most people can manage $300 in savings):

  • Maintain a daily balance of at least $300
  • Set up at least $25 per month in autosave or automatic transfers from checking
  • Have a linked College Checking account
  • Be under age 18
  • Have certain eligible Checking accounts linked

Taxes

For tax purposes, interest earned from a Saving Account is reported on Form 1099-INT. Before tax season, the bank will generally mail one copy to your billing address and one copy to the IRS. Some smaller banks may require you to download it yourself through online banking.

Tax Filing for Residents

When filing taxes, you simply report the interest income. Add up all interest shown on your 1099INT forms and enter it on 2b Taxable interest. Since Saving account interest is usually paid monthly, you just report the total interest earned for the full year.

If Box 4 Federal Tax Withhold on the 1099INT shows federal withholding, then include it in Federal income tax withheld under b Form (s) 1099.

Depending on your income, the tax rate ranges from 10%-37%. The 2022 income tax calculation is shown below. You can check which bracket you fall into to estimate roughly how much tax you may owe on the interest.

Tax Filing for Nonresidents

Note that for nonresident taxpayers (for example, students who have been in the US for less than 5 years), bank deposit interest is generally not subject to interest tax. If your 1099INT shows Federal Withhold, you may be able to claim it back when filing your tax return. Whether or not there was withholding, 1040NR still needs to be filed, and you just need to enter the applicable Tax Treaty Article on the form.

Summary

Saving Account products can be a worthwhile place to hold cash during a period of relatively high interest rates like this one. I suggest keeping short-term emergency funds in Saving, since it offers strong flexibility and funds can be accessed anytime. For other low-risk cash management options, see:

  • Saving Account savings account (this article)
  • Certified Deposit (CD) certificate of deposit (not yet published)
  • Bonds (not yet published)
  • Money Market (not yet published)