Are you leaving money on the table? In this episode of Coffee with Waymark, Brendan discusses several ways to earn more interest on the cash you keep in your checking or savings account. If you consider the 1% interest your bank offers to be satisfactory, you'll certainly be intrigued by what this video has to share.
Topics Discussed:
Is 1% a good rate to earn on cash?
How to find banks with higher checking and savings interest rates
Certificates of Deposit (CDs)
LPL money market funds
Treasury bills, bonds, and notes
Transcript:
Hi, and welcome to another episode of Coffee with Waymark. Today's episode is going to be on trying to improve the amount of money and interest you're getting on your cash.
So one of the things that I talk about a lot with clients and prospective clients is that financial planning should be free. Or at least, if there's a fee that's being charged for financial planning that it is reduced by the financial planner introducing you to something that you may not have been introduced to on your own. And one of those things that I continuously see over and over and over with my clients is how many clients are just maintaining the status quo in a historically high-interest rate environment. And the way that that kind of manifests itself is they just keep large amounts of money in their checking account, even when they have a savings account available, even at the same bank that's paying in some cases, 10 times what their checking account actually is. And so a very simple thing that we've mentioned to a number of clients is just keeping in your checking account what you need, and move the rest to savings.
Now, the other thing that I found is that, again, from a status quo standpoint, when it comes to banks, people are just really content with getting a pittance on their on their cash. And I guess it makes sense, because for the longest time, they've been earning 0.1%, even 0.01% on their checking account. And now if they're earning even 1%, they think they're doing great. Well, what I'll show you in a moment, is that the going interest rates are somewhere between 4 and 6%. So if you're under that you're leaving money on the table. And I found with a number of my clients that they actually have large sums of money in cash, sometimes over $100,000. And just real quick math here. For every interest rate increase we can introduce a client to, that increases the interest on that $100,000 by $1,000. So again, a typical financial planning fee can be offset pretty dramatically by just this one piece of advice.
And so I'm not here to recommend anything – and very, very big disclaimer here: anytime you're making a change, whether it's moving from one bank to another or one bank account to another bank account within the same bank, you always have to look at the fine print, because sometimes there are some teaser rates and things that you have to be aware of. So definitely ask the questions.
But with that said, I do see way too many of my clients settling for subpar interest rates. And a very easy, simple way to figure out are you getting what you should be getting on your cash is just do a simple web search. So here I just put in “best checking accounts” and there's a number of sponsored ones, that you always want to take those with a grain of salt. So I usually go to the first thing that is not sponsored. And so typically Nerd Wallet and Bank Rate are typically the ones that pop to the top, when it comes to websites that kind of monitor the best interest rate checking accounts that are out there. And so let's stick with Bank Rate because consistently, I've seen that they've done the best and you can see that so far is paying 2.5%. The rest of them are paying a pittance here, so not really all that much. But then when you shift to savings accounts, now you're starting to look at pretty big numbers 4.5%, 4.75% at very big reputable banks. These aren't just your regular credit unions and truth be told, look at your credit union. I'm a very big fan of credit unions, so definitely take a look to see what they're paying. But 4 and 5% interest rates are not very uncommon these days.
And then one thing to take into consideration when it comes to money market rates is they can change any time, whereas if you lock in a CD for instance – and again, same website, this is bankrate.com – you look at some of the interest rates on these CDs and you're looking at 4 and 5%. And usually somewhere in the neighborhood of I'd say nine to 15 months is the going rate. So the upside to a CD is that you're locking into this rate for a year or even a little bit more than a year, whereas if the Fed for instance drops interest rates between now and that time, you're locked in regardless of where the checking and savings accounts rates have dropped to if the Fed drops interest rates. So definitely take a look at CDs.
Switching gears you can you can look at things that are outside of banks. I know that for some people, that's really scary, because in some cases, you lose FDIC protection. But just for instance, with LPL, we have a number of money market funds that are very similar to mutual funds. But they are invested in money market investments, which are ultimately short-term bonds for all intents and purposes. I prefer personally investing in short-term US Treasury bills, because ultimately, that money market fund is backed by the full faith and credit of the United States government. And my argument is, if the US government fails and treasuries default, well, I don't think the FDIC will be much help because that is a federal insurance program. So I would actually even argue that some of these money market funds are even a little bit more safe than bank funds because the bank would fail, and then the FDIC picks it up. The bank is much more likely to fail than the entire United States government. So there are money market funds that you can buy through LPL. And the way that that works is let's say you have that $100,000, you transfer it to a brokerage account here at LPL, we invest it just like we invest in a mutual money market fund. And within a day, it's invested in, in some cases, a 5-plus percent money market fund. And again, some of these actually have some tax advantages, because if they're if the money market fund is comprised of US Treasuries, then US Treasuries do not charge state income tax. So obviously, I'm a little biased here. But if you have money that is available, and that you're not using, you could get a potentially 5-plus percent interest rate as of August 22, right now, and not pay state income tax on that interest. So very, very attractive there.
And then if you really wanted to lock in a rate for a long period of time, because all these things that we're talking about right now, checking account obviously can change every day, savings account change every day, money market funds can change every day. And then CD is one of the things we just talked about a moment ago, you're locked in for a year or so. But if you want to lock in these interest rates even longer, you can go to treasurydirect.gov. And treasurydirect.gov is the place where you can buy directly treasury bills, bonds, and notes. And when it comes to these bonds you're looking at, these are the types of securities that you'll be buying - treasury bills, or up to one-year
treasury notes are two, three, five, seven, and 10 years, and then treasury bonds are 10 plus years. And so when you look at treasury notes, this is where some of the best bang for your buck is right now. And right now, it's saying that the latest rate is 3.875, but again, the secondary market is actually saying that that rate should be during the next auction over 4%. And you could lock that in for potentially 10 years, which means that even if the Fed drops interest rates, when you're locked in for 10 years, you're locked in for 10 years.
So that's again, I don't want to get too deep into this. But those are the things that are out there that are available, and I don't see enough of my clients fully participating in those and they're just simply taking the interest that the bank is offering, which I think you're kind of leaving money on the table. And again when it comes to me and Waymark and our fee, this is one place where I can very easily justify the fee that we're charging people.
So that's all I got for this week. Thanks for listening. And, again, check out your bank and see what you can do about increasing that interest rate. Talk to you soon.
Brendan is the Managing Director for Waymark Wealth Management. He has extensive experience in comprehensive wealth management. His focus includes retirement planning, behavioral finance, investment portfolio construction, education funding, insurance & risk management, taxes, charitable giving, and estate planning. Brendan has an ability to take clients' complex visions and distill them down to simple action plans, helping them move from where they are today to where they want to be tomorrow.
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The opinions voiced in this video are for general information only and are not intended to provide specific advice or recommendations for any individual.