Banks know that, on average, customers are uninformed and/or chose not to take action if they don’t have to. Yet maximizing interest yield on savings is almost as easy as bending over and picking up dollar bills on the ground. If you were walking down the sidewalk and saw a $100 bill lying on the ground, you’d pick it up, wouldn’t you? Now calculate how much interest you’re missing out on in your savings account over the course of a year. ($50,000 will earn over $1,000 in interest at 2%).
Banks are the conventional places to hold excess cash for purposes of upcoming expenses or as an emergency fund, but they aren’t the only options. Brokerage accounts should be considered as well, with many attractive cash management mutual funds and ETF’s available in the marketplace that hold low-risk securities like US Treasury Bills and short-term bonds. Informed savers and investors are taking advantage of current yields of at least 2% net of all fees. Many of these products also trade commission free at brokerage firms like TD Ameritrade, Schwab, Vanguard, and others with no minimum holding periods.
My firm, Lorintine Capital, monitors interest rates and helps clients manage their cash in the most efficient ways possible. We charge a modest management fee of 0.15% for such services and can help you create accounts with TD Ameritrade Institutional that include debit/ATM card and check writing privileges at no additional cost. TD Ameritrade Institutional even rebates your ATM fees. ACH links with your primary checking account can be created. All you have to do is contact us anytime for transfers that usually are completed within 2-3 business days.
Setting up a brokerage account for cash management purposes also leads to client discussions about how much cash and savings is appropriate for your financial goals. Even at a 2%+ yields, interest income net of taxes has a negative expected return over the long-term when inflation is considered.Over the long-term, risk begins to transform from short-term volatility into long-term erosion of purchasing power.
For this reason, we often recommend clients manage their cash as follows:
One month of expenses in your primary checking account.
Three to six months of expenses in a cash management brokerage account that includes check writing and debit card privileges. This account should be thought of as your emergency fund to help avoid needing to dip into retirement savings or having to take out employer 401k or bank loans or accumulate high interest credit card debt. There’s simply no excuse for this.
Any intermediate term lump-sum expenditures within the next 3-5 years should also be kept in either the emergency fund brokerage account or a duplicate of that account (for mental accounting purposes). Examples of this could be funds for purchasing a car, an upcoming wedding, a down payment on a home, tuition expenses, etc.
- For cash with a time-horizon beyond 5 years, we can focus on building wealth through expertly designed equity portfolios from Dimensional Fund Advisors.
Cash is no longer trash if you make it work hard for you. Many banks are profiting significantly from the average American’s inattentiveness to the climbing interest rates. Check your current interest rates and consider making changes if they are not competitive. When you do that, consider basic financial planning strategies like having an emergency fund that is large enough for emergencies without being so large opportunities are lost to invest a percentage of your savings for long term growth and higher expected returns.
Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.