Cash On Hand

If you’ve been paying attention you’ve seen the Fed Funds Interest Rate go from 1.5% to 2.5% over the last year. This should mean good news for savers, right? Your cash should be earning you more interest, but think again…

Federal Funds Rate climbing to 2.4%

Remember when banks used to proudly display their interest rates on a sign in their lobby? It’s been quite awhile since I’ve seen that. Maybe because the bankrate.com collection of average national bank rates reflects a paltry and anemic offering that would be embarrassing on public display:

Checking: 0.08%

Savings: 0.10%

Money Market: 0.21%

1, 2, 5yr cd = 0.88%, 0.94%, 1.44% respectively 

While your money earns 0.100% – are you kidding me?

This is pathetic. Americans have around $9 Trillion in cash savings deposits, and these are our average rates of return? With the Fed Rate at 2.5%, where is the spread going? I’ll tell you where. It’s going to Mr. Banker Man!

Savers who may be blissfully unaware and have their money in a non-interest bearing account are huge boon to the bankers of America. Those who may have accounts in the sub 0.50% range offer the bankers a really nice interest rate spread on their cash. 

Maybe some folks are clueless, too lazy to shop around, or maybe they don’t think the small increase in interest rate is worth the trouble. Apathy is a gift that keeps on giving for the finance industry, as I’ve written about before. Mr. Banker Man is all too happy to have your cash sit idle in an account where he can pay you as little as possible. Remember, a publicly traded bank is going to make money for its shareholders, and being a customer does NOT necessarily make you a shareholder – but don’t let it make you an easy mark either!

Those willing to look around, do a little research, and do a little legwork can easily find rates of 2% or more on their cash – a rate much closer to that Federal Fund Rate and a rate much more equitable for you your hard earned dollar. 

Below we’ll take a look at some different places to hold cash and the advantages and disadvantages of each. I’ve also estimated the interest / yield you can expect to see if you shop around on each option.

1 – In a coffee can or under your mattress. 0.00% interest (very poor option)

Advantage – immediate access, tangible, fun to play with

Disadvantage – susceptible to fire and theft, does not earn interest, tempting to spend

2. Checking / Savings Account 0.02% – 0.15% interest (poor, but better than your mattress)

Advantage – easy access by check or ATM or electronic transfer, usually feels like it’s “down the street” at a local bank

Disadvantage – not the best rate you can find, watch for monthly or annual fees, possible account minimums, possible ATM fees

3. High Yield Checking / Savings 1.8% – 2.2% interest (best option if you can find an account free of fees)

Advantage – easy access by check or ATM or electronic transfer, higher rates (about the best you can get on easily accessible cash)

Disadvantage – may not be local bank, may be online access only, watch for monthly or annual fees, possible account minimums, possible ATM fees

4. Money Market Account 1.8% – 2.2% interest (best option if you can find an account free of fees)

Advantage – higher rates (about the best you can get on easily accessible cash), some can be attached to your regular checking account, fairly easy access

Disadvantage – some trade like mutual funds so you’ll have to wait 1 business day for your cash to clear, some limit withdrawals on a per month basis, may not offer check or ATM access

5. CD • 1-year: 2.70% • 3-year: 2.85% • 5-year: 3.10% (great option, but I’m not a fan due to lack of liquidity)

Advantage – higher interest rates while maintaining safety and security, no risk

Disadvantage – not liquid, your money is tied up for the length of the term, early withdrawals will be penalized

6. Short/Ultra Short Bond Funds 2.5% – 3% yield (very good option, slightly riskier, more liquid than a CD and probably pays about the same, find a fund with very low expense ratio)

Advantage – better interest rate protection against Fed Rate, higher rates than cash alternatives, possible capital gain in addition to yield

Disadvantage – will trade as a mutual fund or ETF, might be subject to a trading commission, no immediate access to your cash, can lose value as bond prices fluctuate

7. Municipal Bond Funds 1.7% – 2.0% yield (tax-free) (very good option, slightly riskier, taxable equivalent yield about equal to a CD with better liquidity, find a fund with very low expense ratio)

Advantage – better interest rate protection against Fed Rate, income is free from federal taxes , possible capital gain in addition to yield

Disadvantage – will trade as a mutual fund or ETF, might be subject to a trading commission, no immediate access to your cash, can lose value as bond prices fluctuate

Capturing the Spread:

Aside from his loan book, where he lends your cash out at rates 3x the Fed Rate, Mr. Banker Man most likely has his cash in AAA-rated municipal bonds. He is gathering a very safe 2% interest tax free, and then throwing you a bone at 0.2% or less in your checking or savings account. A 2% tax-free rate will equate to around 3.5% taxable in higher tax brackets. Extrapolate that across $9 Trillion cash and you’ll see who is winning the cash game. It’s not the average consumer.

Being lazy or inattentive with your cash can be costly. For instance, $1,000 at 0.04% will earn you about 3 cents per month in interest. Crank that up to 2.2% per month and you’ll earn $1.83 per month. No, you’re not going to get rich by keeping your savings in cash at 2.2%, but why give the bank $1.80/month when you can very easily pocket it yourself?

As you grow your cash reserve that difference in interest rate can equate to multiple trips to the grocery store or several of tanks of gas. $20,000 @ 3% pays $50/month, but at 0.08% it pays $1.33/month. See where I’m heading?

Trust me, it’s easy to find 2% or more on your cash. Take a look around and keep your eye on the Fed Fund Rate to make sure your cash is working for you and keeping pace with the current interest rate environment…


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