Over the past decade, it has been incredibly difficult for savers to earn much on their cash savings. However, that is changing as the Federal Reserve raises interest rates to fight inflation. As a result, yields on various treasury vehicles are now becoming more attractive.
Checking accounts are probably the most common accounts holding cash. Over the past decade, many checking accounts have taken their earned interest rate down to near 0%. A common yield offered was 0.01%. With the Fed raising interest rates by 2.5% this year (so far), a 0.01% yield looks outdated. It is worth reviewing the interest you receive as many banks have not raised interest rates.
If the Fed continues to raise interest rates, the gap between what you receive and what you could receive can become quite large. At a minimum, you can maintain a smaller checking balance and a larger balance in any of the following cases.
High Yield Savings Accounts
High-yield savings accounts (popular with online banks) typically offer higher interest rates than a traditional bank while providing normal FDIC insurance coverage. Also, unlike checking accounts, these accounts generally do not have any requirements to be met to be eligible. In today’s environment, where your typical bank’s interest rates are still close to zero, it’s possible to find high-yield savings accounts earning over 2%.
High-yield savings accounts can be a good option for those who don’t want to worry about changing their checking account with all the automatic payment connections. Opening a high yield savings account online can be a simple and effective way to earn interest on your excess cash. Most are set up to allow you to electronically transfer money between your checking and savings accounts.
One thing to check is whether the savings account limits the number of transfers per month. If you plan to transfer frequently, make sure the account doesn’t have a low monthly limit.
Money Market Brokerage Accounts
People with a brokerage investment account with a major custodian like Charles Schwab, Fidelity, Vanguard, etc., can invest their money in money market funds. Unlike bank accounts, these funds are generally not FDIC insured. However, large custodians have a long history of managing these funds through various market cycles. Many of these money market funds have yields above 2%.
Since the returns offered are not significantly different from a high yield savings account, the benefit is primarily for those who already have a brokerage account and do not want to open another. Or, if you have money you’re waiting to invest, you can use the brokerage money market to earn interest while you wait. These yields generally increase as interest rates rise.
Ultra-Short Duration Bond Funds
The last option is to use an ultra-short duration bond fund to get extra yield. Unlike the other options described above, bond funds do not offer FDIC insurance and their value can fluctuate. While these funds may work for those seeking higher returns and who can handle short-term volatility, it’s important to speak with your investment advisor before purchasing one, as these funds vary widely in risk. that they take and yield that you can earn.
With the Federal Reserve’s rapid interest rate increases this year, there are plenty of other options for your money to earn interest. However, your bank may not keep up. Contact your bank and financial advisor directly to find out more about these possible solutions.
Ryan Collier, CIMA, is director of investment management at Bedel Financial Consulting, Inc., an Indianapolis-based wealth management firm. For more information, visit their website at www.BedelFinancial.com or email Ryan at [email protected].