Getting Below the Surface of Deposits: Optimizing Your Liquidity Strategy

Posted September 15, 2023 in Lifestyle by Ashleigh King

Deposits are so foundational to banking that they can be easy to overlook. Rather than wonder whether your personal or business liquidity strategy is optimized, or risking a negative surprise, instead carefully consider the tradeoffs among convenience, yield and risk. A thoughtful review of your cash management strategy with an advisor familiar with your short and longer-term liquidity needs can optimize the most accessible portion of your wealth and ensure you are in a position to take advantage of opportunities.

Consider Your Timeline and Liquidity Needs

As you decide which cash management tactics best match your needs and goals, these questions can guide you to the most customized and effective choices.

• How much cash do you typically keep in your primary deposit account?
• What are your short and intermediate-term cash and liquidity needs?
• How do you differentiate between operational cash and investible liquidity?
• Are you looking for a specific product or a specific interest rate or yield?
• What cash-management tools do you currently use, from online banking to custody and investments to treasury management services?
• What additional services would you like to be able to access?

Assess Deposit Structures

The shortest-term deposit products include checking and savings accounts. The principal benefits to these types of deposits are flexibility and convenience. They frequently have no transaction limits and can earn interest. You may also streamline tax reporting and accounting activities by tracking transactions for individual entities in separate deposit accounts.

Money market deposit accounts are a good choice for money that is not needed to meet day-to-day spending needs or immediate obligations. Like checking and savings accounts, they earn interest, are FDIC-insured and come with online and mobile banking. They often earn more interest, but limit the number of free transactions you can perform.

Certificates of deposit can offer better returns for a larger trade-off in access to your money. You agree to leave your money in the account for a specific term, from a few months to a few years, in exchange for a guaranteed interest rate. CDs are advantageous for those who can structure these deposits to match inflows as well as anticipated future liquidity needs. CD rates can be competitive with Treasury bonds with similar fixed terms but protect you from bond-market variability.

Examples in Action

• Following a liquidity event, a trusted banker can help you determine the optimal timeline for transferring the proceeds from cash to investments, preserving liquidity for taxes and short-term needs while earning a stable return. This strategy can allow you to maintain capital while deliberately and thoughtfully selecting the right asset allocation.

• Shorter-duration certificates of deposit can be attractive for those seeking to avoid stock market volatility. It may be appropriate to combine deposits you hold across different banks to request better rates from a single bank. An experienced and knowledgeable banker can advise you on obtaining CD rates comparable to prevailing Treasury rates, offering a guaranteed rate with the flexibility to make adjustments at predictable intervals.

Whether your needs are personal or business-related, Northern Trust Banking Services integrates our deposit and lending solutions with your broader financial plan to help you act strategically with every financial decision. Contact us to learn how our team can help you optimize your plan.

© 2023 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S.

The information contained herein, including any information regarding specific investment products or strategies, is provided for informational and/or illustrative purposes only, and is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any investment transaction, product or strategy. Past performance is no guarantee of future results. All material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.

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