Higher interest rates mean you can make more money with cash. Here’s how
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Not long ago, it was common to earn low returns on cash – less than 1%.
But that changed after the Federal Reserve launched a series of interest rate hikes to curb inflation. Now investors may be earning up to 5% or more interest on their savings – the most they have earned 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 that works with advisors and consumers to find the best interest rates on cash .
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According to Heather Ettinger, president of Fairport Wealth in Cleveland, Ohio, cash played a minor role in client discussions when interest rates were low.
“When I look at these numbers, I think to myself, ‘Wow, it’s not so bad to be sitting on some money,'” Ettinger said.
The more cash you have, the higher the interest rates can be.
Investors with portfolios of $1.5 million or $2 million could hold up to $300,000 or $400,000 in cash, Halloran noted. At 5%, that can bring in $25,000 to $30,000 per year. Over 10 years, that could add up to $300,000, he said.
Even more modest amounts of cash can still provide a meaningful return. A $50,000 cash reserve earning 5% interest would result in $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 the money is in the wrong place”
But all savers are prone to the same mistake: they don’t invest their money in accounts that provide the best return.
Only one in five savers did it competitive interest rates of 3% or more on their cash, according to a Bankrate survey earlier this year.
Only 31% of those with incomes of $100,000 or more earned at least 3% on their cash.
But savers in this income group were most likely to receive higher interest rates. Only 19% of savers with incomes between $80,000 and $99,999 earned 3% or more on their savings, as did 22% of savers with incomes between $50,000 and $79,999 and 17% of savers under $50,000.
“Here’s this $17 trillion industry, and almost all of the money is in the wrong place,” said Gary Zimmerman, CEO of MaxMyInterest.
Experts say it’s an issue savers need to address.
“Every investor should be able to leverage their savings,” said Max Lane, CEO of Flourish, a fintech company that offers a cash management product to advisors.
“There’s no reason anyone shouldn’t be getting at least 4% right now,” Lane said.
Here are some cash-handling mistakes investors should avoid, according to financial advisors.
Mistake 1: Not looking for the best prices
While many savers know they can get better interest on their money, it’s very easy to do nothing.
“Inertia is one of nature’s most powerful forces,” said Tim Harrington, certified financial planner and founder of Longview Financial Advisors based in San Rafael, California.
Harrington said he tries to explain to savers who hold large balances in low-interest-rate accounts that they lose purchasing power over time.
While a brick-and-mortar bank might offer 0.25% interest on savings, inflation is at 3.2%, according to the latest Consumer Price Index data.
“You should look around,” Harrington said.
Mistake 2: Having too much cash
Some people might be tempted to hold cash to see where the markets are going. According to Harrington, when you look back, you’ll often find that it was a stupid trade.
For example, if they had invested the 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 suitable for emergency funds and other short-term goals with a time frame of less than five years.
Still, some investors may be more comfortable holding cash because it gives them a sense of security.
“The way your gut feels is usually the exact opposite of the way you should invest,” Harrington said.
If you have a financial advisor, Flourish’s Lane says you should talk to them about all of your savings. While financial advisors tend to think they manage all of their clients’ money, no financial advisor actually does, Lane said.
Error 3: Insufficient FDIC coverage
The collapse of Silicon Valley Bank has left savers questioning whether their cash holdings are in order For the first time since the 2008 financial crisis, they are fully insured. The answer is generally yes if the institution holding its money is insured with the Federal Deposit Insurance Corporation (FDIC).
However, there are limits to this protection. Depositors generally have FDIC coverage of up to $250,000 per bank per account holder category.
When banking problems arose at the beginning of the year, the federal government stepped in to provide support, regardless of these restrictions. But savers shouldn’t expect something like this to happen again, said Stelljes.
“It’s really about 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 with their financial institution, he said. Some platforms may offer enhanced FDIC protection through the use of multiple backing banks.
It’s 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 ways to address it, he said.
https://www.cnbc.com/2023/09/10/higher-interest-rates-mean-you-can-earn-more-money-on-cash-heres-how.html Higher interest rates mean you can make more money with cash. Here’s how
