Cash in with a better cash strategy, earn higher interest
Do your bank deposits still earn next to nothing? They shouldn’t be, and you don’t have to take it anymore. I know that banks haven’t paid much in interest since the last financial crisis, but times have changed. Your accounts should be yielding something closer to 2%, and if they aren’t, you may want to switch banks. If you’ve looked at switching before, you might have come across online banks offering some relatively high interest rates (some as high as 5%). If it sounds too good to be true, it may be. Let’s take a look at online banks and another solution to get you that higher yield.
Online banks are increasingly popular. In the past two years, they’ve increased their market share from 6% of Americans to 27% (Davidson, Paul USA Today). This is largely because customers of online banks don’t usually earn that typical 0.1% on their cash; they’re making somewhere between 2.25% to 2.5%. No wonder one out of every five people has made the switch in the U.S. Although it’s true online banks can pay you a lot more money for cash deposits, they commonly impose constraints on your account:
- Debit card transaction minimums
- Severe limitations on balances
- Low caps on the balance that earns a high interest rate
- Caps on total interest earned
If you get 5% on only the first $5,000 you deposit, it ends up being not that lucrative. For high earners, the hassle of switching banks isn’t worth it. Many banks, completely online or not, offer rates in the 2% range without all the hoops. If you aren’t earning something north of 2%, please know that you are losing value each year.
There’s also the reduced customer service for online banks. Maybe you like being able to walk into your local branch and speak with a banker face to face. If you have banking needs that far exceed those of the typical consumer, switching may not be feasible.
Bottom line: Read the fine print when evaluating an online bank.
You don’t necessarily have to switch banks to get a better yield. You could invest your excess cash into an institutional money market fund within a brokerage account. It is easy to connect to your existing outside bank accounts, and you get to maintain any banking relationships. Yields on institutional money market funds are somewhere around 2.22% to 2.37% right now (depending on the size of the balance). Using this strategy allows you the benefits of a higher yield, preserves your banking relationship and allows you to shift gears on a dime if you need to.
Talk to your advisor
Ultimately, the right choice for every person varies, so be sure to talk to your financial advisor. If you need help figuring out what’s best for you, you can always contact a member of our team.
Drake A. Qualls, Financial Advisor
Davidson, Paul. (2019, May 23) “More American are Finally moving cash to online banks for higher interest rates” retrieved from: https://www.usatoday.com/story/money/2019/05/23/interest-rates-more-savers-moving-their-money-online-bank