Something that I’ve been coming across lately is people who are keeping too much cash in a checking or savings account with a 0% interest rate. They want to keep the money in cash because they want to maintain an emergency fund or they have a short-term goal that they need to pay for, but they don’t know where else to keep it besides where it is.
High Yield Savings Accounts & Money Market Accounts
High yield savings account and money market accounts are savings vehicles at banks or credit unions that typically pay higher interest rates than checking accounts and regular savings accounts. Most of the time, the people who ask me what they should do with the cash that they want to keep on hand are currently earning nothing on it, or maybe something like 0.10%.
A quick Google search shows that there are plenty of high yield savings accounts and money market accounts that are yielding interest rates of over 2% with $0 minimum balances. Many of these are being offered by FDIC-insured online banks.
Note that given that the Fed lowered interest rates last week, the rates on savings accounts and money markets have dropped from where they were, but there are still many options better than 0%. At the time of this writing (8/5/2019), the online savings account that I use has a 2.32% interest rate. However, keep in mind that the bank (any bank) could change this rate at any time.
Remember Short-Term Vs Long-Term Goals
If you have cash that you’re saving for short-term goals, then you want to make sure that it’s in a safe, liquid account where it’s not likely to lose value within the time frame that you’ll need it. This is why high yield savings and money market accounts are solid choices.
Putting your money in the market means that you could lose it by the time you need it to pay for your goal. However, on the other side of things, keeping money in an account where it isn’t earning anything means that it’s losing purchasing power to inflation.
Is The Change Worth It?
If you currently have your cash sitting in an account with a 0% interest rate, then earning 2.32% would mean that you’re earning 23.2 times more on your money. While the dollar amount that you may earn on your cash may not be extremely significant to some (see below), setting up a high yield online savings account and transferring your cash into it rather than letting it set in an account that isn’t earning anything is an easy money win that doesn’t take much effort to take advantage of.
Assuming that you have $10,000 in your checking account, you don’t add anything to it over the course of a year, and you earn 2.32% with no interest rate change, you would earn $234.48 over the course of a year. If the cash balance were $50,000 in the account, then you’d earn $1,172.41 in a year. What about $100,000? You’d earn $2,344.83. I understand that $234.48, or $1,172.41, or even $2,344.83 may not be significant to some, but all three are better than $0.
The Cons
Typically, high yield savings accounts and money market accounts limit the amount of withdrawals or transfers that you can make from them in a month to 6 due to federal laws. For most people, this shouldn’t be a problem because they have a checking account for more frequent transactions but it’s something to be aware of.
Some high yield savings accounts and money market accounts may require that you maintain a minimum balance in order to earn the advertised interest rate. Be sure to check before opening an account. Some may offer a lower interest rate on smaller account balances and a higher interest rate once you hit the minimum.
There are so many banks offering free versions of these types of accounts out there that there’s not really any point that I’m aware of in having one that charges you a fee. If your bank charges a fee for maintaining your account, then you may be able to find a better one somewhere else.
Where’s Your Cash?
Many people know that they should be doing something else with their money rather than letting it sit in their checking account, but few actually do anything about it. The more money that you have, and the longer that you plan on keeping it, the more important it becomes to make sure that it’s earning what it should be. Take a small step today to make your financial life a little bit better.
