By Michael K. Mooney JR., MBA, CFP®
As 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.
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, and the goal of this article is to make you aware that 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! Thus, this article will only focus on ways that you can invest this cash with full safety and flexibility. 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 earn the least amount of money, followed by Savings Accounts, Money Market Accounts, and finally Money Market Funds:
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 FDIC insured up to $250,000 per bank, per individual, meaning that your money is fully protected if the bank goes out of business.
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.
Money Market Accounts: Money Market Accounts should not be confused with Money Market Funds, as these are two different products. Money Market 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.
Money Market Funds: Within your brokerage account, you are able to invest in Money Market mutual funds. While these are very stable and safe funds (the underlying holdings are mainly government bonds), they are not FDIC insured. 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, or if you are not sure, please feel free to reach out to your advisor to discuss. While we wouldn’t normally recommend that you switch banks entirely, you may benefit from opening a separate account at another institution if the savings is worth it to you.