Jason Zweig of the Wall Street Journal wrote a piece on this last month. He noted that nearly $8 trillion of cash is sitting at commercial banks earning an average of 0.09% interest. $8 trillion dollars! The $1 trillion cash sitting at brokerage firms (like Schwab, Fidelity, and TD Ameritrade) earn roughly 0.3% on average. If you’re like most people, my guess is that you have your cash stash in one of these low earning accounts.
As the economy has bettered, the Federal Reserve has consistently raised interest rates over the last year and a half and the current federal funds rate stands at 2.5%. Your bank should raise their offered interest rates in step with the Fed. But as noted above, they most likely have not.
Why should I care?
A prudent financial decision is to keep three to six months’ worth of living expenses in cash. This is often called your emergency fund. Depending on your spending level, this balance can be $30,000 to a couple hundred thousand in cash. If my emergency fund was $50,000, and I was earning an extra 2% in interest on it, that’s an extra $1,000 in interest earned for the year. That’s real money. It’s not as high as it was pre-2008 when you could earn 5%+ on cash, but it’s still much higher than the current 0% rate.
What should you do?
Look to online banks or purchased money-market funds at Schwab or your brokerage firm for your savings account. These currently yield 2.0%+. The online bank accounts are FDIC insured up to $250,000 just like your traditional brick and mortar bank. The money-market funds, while not backed by the government, hold short-term securities whose value tends to hold steady. Money market funds should be paying rates similar to the savings accounts, and if they are significantly higher it should raise a red flag that the fund could be taking excessive risk.
Where can I earn a higher yield?
As of March 13, 2019, here is a list of institutions to consider and the savings account rates that I found on their websites:
Ally Bank: 2.20%
Discover Bank: 2.10%
Synchrony Bank: 2.25%
Schwab money market fund SWVXX: 2.31%
Moving your checking account is likely too much of a hassle. I keep mine at a large brick and mortar bank yet have my emergency savings at an online bank. They are connected so I can access the money in a couple days if needed.
In summary, you can finally earn a small yield on cash, and doing a little leg work is the easiest way to earn additional return with no extra risk.