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Interest rates are going up. Is it time for more cash investments in your portfolio?

As the rates on CDs, money market and high-interest savings accounts go up, these no-risk cash investments are becoming more appealing. Here’s the right way to add them to your portfolio.
by Herb Weisbaum /
Signing Financial Agreements
Buying stocks, even through mutual funds, has inherent risks. But historically, stocks have delivered higher returns over time than any cash investment.FatCamera / Getty Images
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Maybe you’ve noticed: Interest rates for personal savings accounts at some financial institutions are going up.

Yes, the rates at most banks and credit unions remain historically low — the national average for savings accounts is only 0.09 percent, according to Bankrate.com. But better rates are being offered, if you take the time to look for them.

Bankrate’s Best Savings Accounts & Rates Survey shows:

  • The average annual percentage yield (APY) for a one-year Certificate of Deposit (CD) right now is 2.41 percent.
  • The top-yielding nationally available one-year CD is 2.55 percent APY. The last time the interest rate for a one-year CD was higher was June 2009.
  • You can find Money Market Accounts with an APY as high as 2 percent.
  • The best high-yield savings accounts are paying 2.05 percent APY. The last time top-yielding savings accounts were above 2 percent was Sept. 2009.

“We’re kind of going back to the good old days when people actually got rewarded for saving money,” said Liz Weston, personal finance columnist for NerdWallet and author of the book, “Your Credit Score.” “Because interest rates have been down so long, this looks like up to us. It really isn't that much, but you do see some movement in interest rates, finally,” Weston added.

We’re kind of going back to the good old days when people actually got rewarded for saving money.

But as the rates on CDs, money market and high-interest savings accounts go up, these no-risk cash investments are becoming more appealing. Are we at the point where it make sense to increase your cash savings?

“Well, it’s easier to justify and it certainly makes more sense now than it did a few years ago, when savings accounts were paying nothing,” said Matthew Frankel, who writes personal finance and investment advice for The Motley Fool. “You can still get a better long-term return from bonds, but cash gives you much more flexibility in your investment strategy to take advantage of opportunities as they come up.”

Frankel told NBC News BETTER that he’s made a slight tweak to his investment portfolio based on the higher interest rates.

"Generally, I aim for a 70/30 stock and bond allocation in my investment portfolio — 70 percent in stocks, 30 percent in bonds,” he said. “Now that cash is going up and stocks are very expensive, historically speaking, I have modified that to 70 percent stock, 20 percent bonds and 10 percent cash. I did that because I want to be able to take advantage of opportunities when certain prices go down, and it's a lot easier to justify doing that when the yields you get from savings accounts and bonds are now much more comparable than they’ve been in recent years.”

As the Federal Reserve continues to hike rates, returns on cash investments are likely to continue rising, which is why Weston advises against tying up your money in a long-term CD in order to get a slightly higher return.

“You’re never going to beat inflation with a savings account or a CD. These are the kind of investments where you put money aside knowing that you're going to lose value over time,” Weston told NBC News BETTER. “So personally, I wouldn’t lock it up for too long. You’re just putting that money at risk of inflation and it's entirely possible we'll be seeing higher rates in the not too distant future.”

Cash is not for long-term investments

Buying stocks, even through mutual funds, has inherent risks. But historically, stocks have delivered higher returns over time than any cash investment.

And yet, millennials, unlike other generations, prefer cash as a long-term investment. Bankrate asked American adults to choose the best place to park money they won’t need for 10 years or more. According to the survey:

  • Cash was the top choice for millennials (ages 18-37).
  • Thirty percent of millennials chose cash as compared to only 21 percent of those 38 and older.
  • The stock market is the top choice (37 percent) for those 38 and older, but only for 23 of millennials.

It’s not like millennials who put their savings in cash are getting a good return. They have the lowest propensity of any generation to be earning more than 1.5 percent on their savings, the Bankrate report noted. They’re most likely to be earning zero interest, or not even know what rate they’re earning.

Millennials, unlike other generations, prefer cash as a long-term investment.

“For investment horizons of longer than 10 years, the stock market is an entirely appropriate investment. Cash is not,” said Bankrate Chief Financial Analyst Greg McBride. “Cash investments are entirely appropriate for our short-term needs — whether it's an emergency fund, the money we're putting aside for a down payment on a home, a car purchase or even upcoming tuition payments. But cash is not appropriate for those longer time horizons, the things that are a decade or more away — whether it's an education for your newborn or your retirement. Over those long periods of time, cash investments are not going to grow your buying power.”

McBride told NBC News BETTER that he’s concerned that many millennials are so risk-averse that they don’t want to invest in the stock market. By “hunkering down in safe-haven investments” millennials will not be able to accumulate the nest egg needed for a financially secure retirement, he said.

Remember: While current market volatility can be nerve-wracking, if your financial horizon is decades in the future, the trends for stocks is clearly upwards.

“Markets are volatile day to day, no doubt about it, and that's why it's not appropriate for short-term needs,” McBride said. “But your biggest risk over the long term is investing too conservatively. Over the long run, you'll see your returns whittled away by inflation; you're not going to see any growth in buying power from those safe-haven cash investments.”

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