How Much Is Your Cash Costing You? Four Ways to Enhance Returns
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Cash that earns less than the rate of inflation is actually losing value, even if it is in an account for only a few months. According to Bankrate.com, the national savings average is a paltry 0.11 percent as of mid-2014.
Whatever their reason for holding cash, savvy investors don’t settle for the tiny amount of interest it would earn in a regular savings account. As with other investments, they make sure they receive the best yield possible for the lowest amount of risk.
After all, with the power of compound interest, every fraction of a percentage point earned multiplies over time, eventually adding up in a dramatic way.
Here are the best ways to earn more on your cash:
1. Higher-yielding bank accounts
Online banks are paying the highest rates for savings accounts today because they don’t have the high overhead costs of brick-and-mortar banks. There’s no real estate to buy or lease and there are no tellers to employ or air conditioning bills to pay. In turn, leading online banks are paying 0.75 percent to 0.90 percent on deposits—considerably more than most savings accounts or money market funds—as of mid-2014.
These banks are FDIC-insured (be sure to check for the FDIC logo on each bank’s web page), so your money is protected just as it would be in an FDIC-insured brick-and-mortar bank. (FDIC insurance covers all deposit accounts, including checking, savings, money market accounts, and certificates of deposit, up to a combined $250,000, or up to $1 million for married couples via a combination of individual and joint accounts. Money market funds, however, are not FDIC-insured.)
Leading online banks also offer accounts with no monthly fees, transfer fees, or account minimums.
Account minimums in particular can cost you real money. If, for example, you leave your cash in a brick-and-mortar account that requires a $50,000 minimum balance, it could be costing you $400 per year. That’s because online banks are paying approximately 0.80 percent more in interest than their brick-and-mortar counterparts, and you’re losing out on that higher interest rate if your cash is sitting in a brick-and-mortar account for a year.
If you’re willing to do your research and stay on top of which banks are offering the most interest as rates change, maintaining online bank accounts could be a great strategy for maximizing the return on your cash.
For investors who don’t have time to keep tabs on rates or manage multiple online bank accounts, Six Trees Capital LLC recently unveiled a new membership service called Max, which can be found at MaxMyInterest.com. Max helps its members keep their cash protected across multiple FDIC-insured online bank accounts while they earn 0.60 percent to 0.80 percent more in interest than they would via brick-and-mortar bank accounts or money market funds.
The service also offers several other cash management tools that can make it easy to see all accounts at once and transfer funds back and forth from savings to checking.
Depositors can link their existing checking account to Max alongside up to five online savings accounts. Max monitors interest rates daily. As rates change, it periodically instructs the banks to move funds between its members’ own bank accounts so that they can earn as much as possible while staying within the FDIC insurance limits.
Max members interact normally with their checking accounts, but excess cash is swept to each member’s online savings accounts where it can earn more in interest.
Note that Max charges a fee of 0.02 percent each quarter. This works out to 0.08 percent per year or roughly 10 percent of the incremental interest that can be earned via its system at today’s interest rates. At present, Max members are earning an average 0.87% on their cash, or 0.79% net of fees.
If you are willing to lock up your money for longer periods of time, some banks are paying relatively high interest rates on certificates of deposit (CDs). Many investors keep more cash available than they really need, and CDs can be a better way to earn more on cash that isn’t needed in the near-term.
Consult Bankrate.com’s ranking of CDs by yield to see which ones have the top rates. The highest-yielding CDs are now paying up to 1.1 percent for a one-year term, with minimum balances that can range from nothing to $25,000.
The downside of CDs is that you lose access to your money for the term of the CD. Keeping cash accessible can be important if you’re holding cash on the sidelines of the stock market, waiting to invest when the market dips. However, many online banks offer CDs that have fairly liberal redemption policies, meaning you can break the CD to regain access to your funds with minimal penalty.
4. Alternative forms of interest
Another way around low interest rates is to get a different currency from the bank in return for parking your cash there. Ron Lieber, the “Your Money” columnist for the New York Times, has written about his experience with BankDirect, a division of Texas Capital Bank that offers depositors American Airlines frequent-flyer miles.
Through a partnership with the airline, BankDirect pays account holders 100 AAdvantage® miles per month for every $1,000 of their average daily balance up to the first $50,000 on deposit and 25 miles per $1,000 on deposit above that amount. So for a deposit of $250,000 cash, you could earn 120,000 AAdvantage miles per year. (That same amount of cash in an online bank might yield $2,000 of interest income over that same period.)
Although the account yields almost no interest—with a $12 monthly fee, depositors earn no interest on accounts below $2,500 and 0.01 percent interest on amounts above that—the airline miles could be a great deal, especially if American is your preferred airline and you can redeem the miles for tickets that would cost more if you paid cash.
This is particularly true if you are able to redeem the miles for business class tickets to Europe or Asia, as these tend to deliver considerably more value-per-mile than tickets for domestic flights.
Gary Zimmerman is the founder of MaxMyInterest.com, a service that helps investors earn more on their cash deposits automatically, even as interest rates change, via a network of leading FDIC-insured online banks.
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