Let’s Talk About Cash

If you haven’t compared the interest rate you’re currently earning at your bank or credit union against available alternatives, now is a good time to do so. This is especially true if you hold a meaningful balance in a savings account, as we encourage you to do. Cash reserves are the first “bucket” of money in a well-crafted asset management plan, constituting a “base layer” of reserves which does not fluctuate in value, as well as providing immediate access to funds. (The second and third “buckets,” or tiers, consist of intermediate-term assets, which might be invested in a diversified mix of stock and bond funds in a brokerage account, and long-term assets, which would similarly consist of a balanced mix of low-cost stock and bond funds in a taxable or retirement account.) Specifically, I’ll call this cash reserve “tier 1b” to distinguish it from what I’ll call a household’s “working capital,” or cash which flows in and out on regular basis primarily to pay bills through a checking account. It’s the interest rate that you’re earning on this savings account balance which is not needed for monthly expenses that I’m exploring here. Take a peek at your current rate; I’ll wait. Is it something on the order of 0.19%? Or even a few multiples of that? If so, keep reading.

To be clear, the simplest solution here, as with many things…is to do nothing. After all, as long as your cash is currently FDIC-insured (or NCUA-insured for credit union balances), you might feel that nothing is on fire, and you’re happy to focus your energy on other activities such as how to keep your cat from sleeping in the newly-cleaned laundry. (Actually, we all know better than trying to change cat behavior.) There is a hassle factor to this exploration: however simple it might be to find and maintain a new, higher-yielding home for a portion of your cash, it still represents more effort than simply ignoring that I raised this question in the first place. I understand. To quantify this hassle factor, let’s say you have $10,000 in a savings account earning that underwhelming interest rate of 0.19%. If you could earn 5.00% on that balance, your annual increase in interest earned would be $481. Is that enough to warrant a little effort? What if your savings balance was $25,000? Or $50,000? In the latter example we’re talking about $2,405 per year in increased interest earned. Is that enough to pique your interest?

How did we get into this low-yield situation in the first place? It’s hard not to feel a little insulted by your bank when you notice that they’re paying you pennies each month in interest. To quote the Wall Street Journal, “Big banks have enough other income streams that customer deposits just don’t play as big a role, and they count on “stickiness”—marketing-speak for a combination of inertia and hassle factor—to keep people from uprooting their financial lives to chase after a couple of percentage points.” To rephrase that, banks and credit unions will pay us just enough to keep most of us from moving our money. We do know it’s not personal, but it’s still nice to remember that it’s just a business calculation at play. So what’s changed lately in the world of interest rates? Why are we talking about new options now?

Credit the US Federal Reserve Bank for these new opportunities. In an effort to rein in rising inflation throughout the economy, the Fed has raised short-term interest rates from near zero to a range of 5.25% to 5.50% in less than a year and a half. While the central bank’s goal has had little to do with providing savers better-yielding savings accounts, one effect of their actions has been just that. It’s simply a better time to be a saver than it has been for many years. And therein lies the opportunity.

In most cases, this new account would supplement your existing savings and checking accounts. It would represent a “high-speed” option, to and from which you’d transfer excess cash to earn a more satisfying rate of interest.

How to find a better-yielding savings account? Online searches offer helpful resources. First, let’s look at a few considerations:

• Money market fund or high yield savings account?

These two variations on deposit accounts are similar enough to make both solid choices for most situations – provided you choose only an FDIC- or NCUA-insured account. Some money market accounts offer direct access through check writing or even an ATM card. High yield savings accounts are linked to an existing checking or savings account, between which you transfer balances as you choose.

• Savings/money market account or a CD?

Once again, both options are viable. Their suitability corresponds, in part, to the timeframe you envision not needing access to the money selected. Savings/money market accounts fluctuate with current interest rates. That’s both good and bad, as they’ll respond quickly to changes in prevailing rates – in both directions. In most economic environments, these changes are relatively modest, so the gain and loss over the course of several months is commonly unremarkable. CD’s, on the other hand, lock in a rate of interest over the term of the instrument. This is also…potentially both good and bad. Who among us knows the near-term direction of interest rates? It’s actually notoriously difficult to predict. Given that reality, it’s essentially a toss-up as to which route will yield the higher earnings.* Yes, there is a small caveat: banks and credit unions will sometimes offer rates which look relatively attractive on CD’s of various durations. Either they are simply eager to attract new investors, or they are making an interest rate forecast for the term of the CD. All to say that there’s little, if any, free lunch to be had on betting on future interest rate directions.

If you do choose the CD route, you can easily “roll over” your CD into a new term at maturity. You’ll be offered then-current CD rates, of course. If you need access to your money in a CD before it is scheduled to mature, it is usually possible to access it by simply forgoing a portion of the interest you would have earned. Read the CD’s terms before investing.

Finally, you could “ladder” a series of CD’s, if you wish, to attempt to mitigate against future interest rate fluctuations. This method would involve investing a portion of the cash you expect to not need in the near future in CD’s of various maturities, rolling them each over into a new CD as it matures. Does this guarantee you a better overall rate of interest than investing in a high yield savings account or money market account would? No. It’s just a different method of pursuing a similar goal.

OK; are you ready to shop for higher-yielding cash investments now? Here are a few ideas:

• If you prefer an institution which you can visit in-person, we’re partial to local credit unions. They are cooperatives, after all, and commonly offer competitive rates.
• You’ll very likely find more attractive rates online than locally. Shopping online, of course, vastly widens the net you can cast to find attractive-yielding accounts. Rates fluctuate frequently, so don’t obsess over finding the very highest yield listed today. Here are a couple of sites which can help you find appealing options. We don’t specifically endorse these sites; we simply offer them as potential resources:
  • savebetter.com (also called Raisin)
  • depositaccounts.com

Did I sufficiently emphasize the need to ensure that your cash balances are FDIC- or NCUA-insured? Generally speaking, FDIC insurance protects up to $250,000 in individual deposit accounts and up to $250,000 for each person’s share of joint accounts. If your balance exceeds those values, you’ll want to shop for separate accounts at different financial institutions to ensure coverage. For more information on deposit insurance, please visit the FDIC’s website: https://www.fdic.gov/resources/deposit-insurance/.

Whew; that’s all we’re going to cover today. Remember, the goal here isn’t to turn yourself inside out trying to squeeze the very last penny out of your savings. The goal should be to improve the return on your cash. Once in place, your new account can serve you for years. Or, now that you know the ropes, you can periodically repeat this process to see if there are materially better options available. If the hassle factor feels tolerable.

Happy savings!