It’s a dilemma! You have cash, need to hold it for emergencies or for a future purpose, but you are earning almost nothing from the bank. Why are interest rates so low? You want to keep the money safe, but where can you earn a higher rate of interest?
This spring the Federal Reserve lowered the Fed Funds rate to zero percent in an attempt to stimulate the economy. While the cut was intended to incentivize large banks to loan money, there were other meaningful effects. Aside from the long-term structural consequences that artificially low interest rates have on the economy, interest rates on checking and savings accounts also declined, essentially to zero.
This left investors scrambling to find ways to earn interest on their cash. Luckily, there are options available that likely provide better yields than most banks. You just need to be savvy, know where to look, and understand that options may carry some requirements or not even be entirely risk-free.
Rewards Checking Accounts
Reward checking accounts are one option for savers to continue earning interest. These accounts are fully FDIC insured, but typically impose a cap on the dollar amount eligible for the higher interest rate (currently ~3.0%) and may necessitate other requirements be met in order to qualify.
For example, the 3.0% interest rate may only apply to the first $15,000 in the account. Additionally, you may be required to make a certain number of debit card purchases per month to qualify. While it is possible for rates to drop, many institutions have maintained attractive yields for much of the past decade. This may not be a solution for all of your cash needs, but an attractive yield on even a portion of your cash in this low interest rate environment is appealing, nevertheless.
High Yield Savings Accounts
High yield savings accounts (popular with online banks) typically offer interest rates that are higher than those at a traditional bank, while still providing the normal FDIC insurance coverage. Unlike rewards checking accounts, these accounts do not have requirements that must be met to qualify, nor do they cap the amount of money eligible in the account. Because of this the yields tend to be lower. In today’s environment where interest rates at your typical bank are essentially zero, it is possible to find high yield savings accounts yielding ~1.0%.
Cash Management Accounts
Individuals with a significant amount of cash face two issues: finding attractive yields and ensuring all of their savings is protected by FDIC insurance. Presently, FDIC insurance only provides coverage on the first $250,000 for each eligible account at a bank, leaving balances greater than that at risk. In order to protect more money, it would be necessary to open accounts at multiple banks and regularly monitor all of their interest rates, a tedious process.
To solve this issue, investors may be able to access cash management accounts through their financial advisors that are structured to provide FDIC insurance coverage on up to $4 million cash for joint owners at competitive interest rates. Currently these rates are approximately 0.7% on the first $500,000 of deposits. This extra coverage is accomplished by systematically spreading cash deposits among a number of program banks, taking advantage of the full FDIC insurance coverage offered by each bank. Ultimately, this could be a great option for individuals that are looking for a simple way to protect cash that is in excess of normal FDIC insurance, while also earning interest.
Ultra-Short Duration Bond Funds
The final option is to use an ultra-short duration bond fund to earn additional yield. Unlike the options discussed above, bond funds do not offer FDIC insurance and it is possible for their value to fluctuate in the market. While these funds may work for those seeking decent yields who can stomach short term volatility, it is important to talk to your investment advisor prior to purchasing one because they can vary greatly in the amount of risk they take.
With the Fed holding interest rates at zero, it is a challenging time to find solutions for your cash. Luckily, there are different options available for individuals with varying cash balances and seeking differing goals. Contact your financial advisor directly to learn more about any of these possible solutions.