How to Get the Best Interest Rate on Cash!

One of the first things I notice when preparing financial plans for clients are the interest rates being paid to them on their checking and savings accounts. You would expect that those rates have increased in 2022 given that the federal funds rate has increased to between 3.75% to 4%, and the prime rate is now at 7%. Not so much….

So let me explain why I am spending so much time on this topic. 30-year mortgage rates are currently over 6.5%. As for interest rates earned on checking and savings accounts, it can start as low as 0% for checking and 0.01% for savings. I’ll say it – those days are long gone, and interest on your savings account should be much higher. Not much of a conversation piece if my clients weren’t sitting on cash in their checking and savings accounts. But they are…. I can’t say I blame them. Yes, this is the time to be investing given the volatility of the market and the potential for a recession. As has been said in the past, these are the times for many to amass great wealth. You must invest to amass great wealth, though!

But there is so much uncertainty in the world that is caused from market volatility and even a possible recession. And most people do not have the means to deal with uncertainty. Yep, I am talking about not having 6 months of income saved in an emergency fund.

Let’s dive into optimal ways to invest your savings, including your emergency fund. Depending on your bank, you may be getting no interest on your checking account. Always keep a minimum balance in your checking account if it is not earning interest. Yep, that means transferring excess cash at least monthly to an interest-bearing account. Keep in mind that many businesses have accounts with banks that automatically transfer excess cash DAILY to investment accounts to earn the highest interest rate possible on that excess cash. That feature is not available to you, and I am not proposing that you transfer excess cash balances to savings daily…. Monthly works fine!

Now let’s talk about where to stash that excess cash for, let’s say, an emergency fund.

Money Market Accounts:

This is simply a savings account that earns interest. But the interest rate is typically higher than the rate on a savings account. Many banks offer money market accounts, and typically, online banks offer more competitive money market rates. The reason why is because online banks do not have nearly the same amount of overhead/expenses as do large financial institutions. Lower costs mean higher interest rates on savings. The downfall is not having accessibility to a bank branch and relying on customer service over the phone.

Most banks require a minimum balance to open and maintain a money market account. Be aware of what that minimum is as fees are charged if your balance goes below the minimum balance. Also, banks tend to limit the number of withdrawals from a money market account each month. There is a reason for banks to limit the number of withdrawals, but that is a much bigger topic on how banks manage incoming and outgoing flows of cash.

One other benefit to note is that money market accounts have insurance protection from the Federal Deposit Insurance Corp. (FDIC) that covers up to $250,000 per depositor per bank. If you have more than $250,000 in a money market account, move the excess to a different financial institution to ensure full protection of your cash from the FDIC.

Money Market Funds:

A money market fund is a mutual fund consisting of financial instruments, including U.S. Treasuries, CDs, corporate bonds and other short-term investments, that entail a low level of risk and high level of liquidity. You can purchase them directly from mutual fund companies or brokerage firms. And they do offer higher interest rates than savings and even money market accounts. Think about it – where do you think banks, including online banks, invest their excess cash for higher returns? Yep, they are making money off of money market accounts too!

Here are a few tips for selecting a money market fund. First, check for the highest interest rate. Second, check for internal costs associated with the money market fund. ALL mutual funds charge an internal fee, but some fees are more reasonable than others. As an example, if the money market fund pays 2.9%, and the internal cost is 0.4%, the net return to you is 2.5%. Third, check for minimum balances. Most money market funds that pay out higher interest rates than their competitors have a high minimum balance requirement. Works the same with annuities, by the way. And there is a justifiable explanation. Again, too much for this post.

As a downside to those higher interest rates money market funds offer, there is no FDIC protection for money market funds. There is some protection from the Securities Investor Protection Corp. (SIPC) though for cash and securities held by a customer at a financially troubled SIPC member brokerage firm. Therefore, there is no guarantee of principal for money market funds.

In conclusion, do your homework! Find out which accounts will pay the best interest rates on your cash, especially if you have large cash balances, let’s say for an emergency fund??!!.. Take into consideration the pros and cons for each option. The FDIC protection of a money market account may outweigh the higher interest rates offered by money market funds. And don’t keep excess cash in an account paying minimal interest on your cash. I sure don’t make decision making easy, do I? I am even giving you homework.

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DISCLAIMERS: All information provided by Hartmann CFO, LLC and Healthy in Retirement is intended for informational purposes only. The views expressed are personal opinions and should not be construed as financial or tax advice for your specific situation. Please make sure to do your own research or find a trusted financial professional, tax adviser or attorney before making any financial decision on your own.

Neither Hartmann CFO, LLC, Healthy in Retirement nor its owners make any representations as to the accuracy or suitability of the claims made here. Nor does Hartmann CFO, LLC, Healthy in Retirement, or its owners assume any liability regarding financial results based on the use of information provided here.