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By Michael K. Mooney JR., MBA, CFP®
Financial Advisor
Why increased costs for buying homes, cars and credit cards?
Make your money work harder even in raising rate environments. When the Federal Reserve raises interest rates, the cost of borrowing money goes up; this increases costs when consumers take out a loan to buy a home or car, spend money on a credit card, or most other types of financing. Overall, the increase of rates is often seen as a negative for consumers and businesses alike. Nonetheless, it is the most effective way that the Federal Reserve can cool off the economy and bring down inflation.
Earn more money on your cash savings
However, there is one positive from increased rates – the ability to earn more money on your cash savings held at the bank or in your brokerage account. While this ability has been mostly forgotten about for several years, as pretty much any type of account was paying next to nothing for interest, this has since changed. Certain account types and banks are now paying very competitive rates, while others have yet to increase their rates very much. There is a large degree of variability between rates. Get in-in-the-know for how you may be able to earn some extra money on that savings.
Whether it is for individuals, families, or businesses, cash is held for many short-term needs including emergency savings, retirement income, savings for an upcoming goal or project, etc. The main goal for this asset class is that the money is there when you need it!
Here, we only focus on ways that are both, flexible and that will not raise your overall risk profile. While some other products (certificate of deposits/CDs, short-term bonds, etc.) may earn higher rates, they will often lock up your money for a specified period of time.
Typically (although there are exceptions), the rates at larger banks are more inelastic to rate changes, meaning that they will often be lower, overall. It is likely that those banks find that they do not need to have as high of rates to compete for customers. On the flip side, many community and local banks could have very competitive rates, as they seek new business.
All things else being equal, cash held in a checking account at the bank will generally earn the least amount of money, followed by savings accounts, money market deposit accounts, and finally money market funds:
1. Checking Accounts:
Cash held in your checking account is for the shortest-term needs, including for paying bills directly out of, going to the ATM, writing checks, etc. There is likely always a need to have money in your checking account for these purposes, but we wouldn’t expect you to earn a high rate of interest in this type of account. Like most accounts at the bank, checking accounts are covered by FDIC insurance up to $250,000 per depositor, per FDIC-insured bank, for each account ownership category (i.e. personal account, joint account, etc.).
2. Savings Accounts:
Savings accounts are offered by banks as a way to earn more interest, without the typical transaction frequency of deposits/withdrawals that a checking account has. Savings accounts through your bank are also FDIC insured.
3. Money Market Deposit Accounts:
Money market deposit accounts should not be confused with money market funds, as these are two different products. Money market deposit accounts are typically offered by banks and are held directly at the bank. They often will have higher rates than savings accounts, and are still FDIC insured.
We recommend that you reach out to your bank to see what you are currently earning on your cash, and to see if they have other options for higher interest accounts. If you have several of these accounts, you may want to then move some cash between your accounts (i.e. move cash from your checking to your savings if you don’t have an immediate need for it) in order to accrue more interest.
4. Money Market Funds:
Within your brokerage account, you are able to invest in money market mutual funds. A money market fund is a type of mutual fund that can only invest in certain high quality short-term debt securities issues by the U.S. government, U.S. corporations, and state and local governments. These funds can be taxable or tax-exempt depending on their investment universe.
By law, money market funds can only invest in securities with maturities of less than 13 months, and the average maturity of all the securities in the fund’s portfolio cannot exceed 90 days. An investment in a money market fund differs from having a traditional bank money market deposit account and is not insured by the FDIC. However, SIPC coverage does protect your securities, including money market funds and cash held in your brokerage account. SIPC will replace missing securities and cash of up to $500,000 per client, including $250,000 in cash. Money market funds will typically offer higher rates than the rest of these types of accounts.
We recommend that you reach out to your bank to see what you are currently earning on your cash, and to see if they have other options for higher interest accounts. If you have several of these accounts, you may want to then move some cash between your accounts (i.e. move cash from your checking to your savings if you don’t have an immediate need for it) in order to accrue more interest.
If you find that your bank does not have great rates, please reach out to your personal banker with questions on specific bank products or reach out to your financial advisor to discuss strategies to help put your uninvested cash to work.
Deposit products and services are offered through Wells Fargo Bank, N.A., Member FDIC.
Mutual Funds are sold by prospectus. Please consider the investment objectives, risk, charges and expenses carefully before investing. The prospectus, which contains this and other information, can be obtained by calling the fund company or your financial advisor. Read the prospectus carefully before you invest.
Brokerage Services are offered through Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.
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