Higher interest rates mean you can earn more money on cash. Here’s how

Xavier Lorenzo | Moment | Getty Images

Not long ago, it was common to earn low returns on cash — less than 1%.

But after the Federal Reserve embarked on a series of interest rate increases to tamp down inflation, that has changed. Now, investors may get as much as 5% or more interest on their savings — the most they have been able to earn in about 15 years.

“What I hear from advisors these days is the phrase, ‘This is real money now,'” said Michael Halloran, head of partnerships and business development at MaxMyInterest, a company working with advisors and consumers to identify best interest rates on cash.

More from Personal Finance:
46% of 401(k) investors are clueless about their investments
4 differences between money market funds and high-yield savings
Homeowners say roughly 5% is magic mortgage rate for moving

When rates were low, cash was more of an afterthought during reviews with clients, according to Heather Ettinger, chairwoman of Fairport Wealth in Cleveland, Ohio.

“Now, I look at those numbers, and it’s like, ‘Wow, it’s not all bad to be sitting on some cash,'” Ettinger said.

The more cash you have, the more the interest can add up.

Investors with portfolios of $1.5 million or $2 million may be holding as much as $300,000 or $400,000 in cash, noted Halloran. At 5%, that may earn $25,000 to $30,000 per year. Over 10 years, that may add up to $300,000, he said.

Even more modest cash sums may still provide meaningful returns. A $50,000 cash reserve earning 5% interest would have $2,500 in interest income over the course of a year, noted Steve Stelljes, president of client services at The Colony Group, which has offices in several states.

‘Almost all of this cash is sitting in the wrong place’

Yet all savers are susceptible to making the same mistake — not putting their money in accounts that provide the best yield.

Just 1 in 5 savers have competitive interest rates of 3% or better on their cash, a Bankrate survey from earlier this year found.

Just 31% of those with incomes of $100,000 or more were earning at least 3% on their cash.

Investors can now get paid by saving their money, says MassMutual CEO

Yet savers in that income group were most likely to be getting higher rates. Only 19% of savers with incomes between $80,000 and $99,999 were earning 3% or more on their savings, as were 22% of those with incomes between $50,000 and $79,999, and 17% of those under $50,000.

“Here’s this $17 trillion industry, and almost all of this cash is sitting in the wrong place,” said Gary Zimmerman, CEO of MaxMyInterest.

Experts say it’s an issue savers need to address.

“Every investor should have their reserve savings working for them,” said Max Lane, CEO of Flourish, a fintech company providing a cash management product to advisors.

“There’s no reason somebody shouldn’t be getting at least 4% right now,” Lane said.

Here are several mistakes with cash that financial advisors say investors should try to avoid.

Mistake 1: Not shopping around for the best rates

While many savers may know they can get better interest on their money, it is very easy to do nothing.

“Inertia is one of the strongest powers in nature,” said Tim Harrington, a certified financial planner and founder of Longview Financial Advisors, which is based in San Rafael, California.

For savers who are keeping large balances in accounts providing low interest rates, Harrington said he tries to explain to them that they are losing spending power over time.

While a brick-and-mortar bank may be offering 0.25% interest on savings, inflation is 3.2%, based on the latest consumer price index data.

“You should shop around,” Harrington said.

Mistake 2: Holding too much cash

Some people may be tempted to hold cash to see where the markets go. When they look back, they’ll often find that was a foolish trade, according to Harrington.

For example, if they had invested that money in the S&P 500 instead, they would be up over 15% this year.

Money earmarked for long-term goals should always be invested in the market, he said. Cash is appropriate for emergency funds and other near-term goals, where the timeline is less than five years.

Yet some investors may be more comfortable holding cash due to the feeling of safety it provides.

“The way your gut feels is usually the exact opposite of the way you should be investing,” Harrington said.

If you have a financial advisor, you should be talking to them about all of your cash savings, according to Lane at Flourish. While financial advisors tend to believe they manage all of their clients’ money, no financial advisor truly does, Lane said.

Mistake 3: Not having proper FDIC coverage

The failure of Silicon Valley Bank has prompted savers to question whether their cash balances are fully insured for the first time since the financial crisis of 2008. The answer is generally yes, if the institution that has their money is insured by the Federal Deposit Insurance Corporation, or FDIC.

But there are limits to those protections. Depositors generally have up to $250,000 of coverage per bank, per account ownership category through the FDIC.

When banking troubles cropped up earlier this year, the federal government stepped in as a backstop regardless of those limits. But savers should not count on that happening again, Stelljes said.

“It’s really being aware of how much you have and whether you’ve exceeded the limit,” Stelljes said.

Investors may be able to access additional FDIC coverage by opening more accounts at their financial institution, he said. Some platforms can offer enhanced FDIC protection by using multiple support banks.

It is important to know whether your institution offers FDIC protection, what your personal limits are and whether you’re exceeding them, and, if so, there are options to address that, he said.


News7g: Update the world's latest breaking news online of the day, breaking news, politics, society today, international mainstream news .Updated news 24/7: Entertainment, the World everyday world. Hot news, images, video clips that are updated quickly and reliably

Related Articles

Back to top button