Are you still sitting on a pile of cash at the bank?
Have you wondered why you still aren’t earning any interest in your checking or savings account even though interest rates are so high?! We all hear about interest rates being high EVERYWHERE, but for some reason that’s not the case in your bank account. Well, unfortunately, there’s a reason for that and the dynamic probably isn’t going to change anytime soon. Banks gladly take in your deposits and then lend out your money to others at a higher rate, using a fractional reserve system, meaning they can lend more out than they actually have in deposits. The difference between what they pay you in interest, and what they get paid on the loans, is their profit. Their goal is to keep the interest they pay to you as low as possible.
Is there anything you can do?
YES, absolutely.
Similar to our October 2022 Newsletter where we highlighted the U.S. Government Treasury market, these interest rates continue to outpace bank rates by a significant margin. For example, as of today, if you were to buy a treasury bond for 12 months, you would receive a 4.88% (as of 5/1/2023) interest rate. Additionally, an advantage to treasuries is they generally have tax advantages on the income that interest within a checking/savings account doesn’t have; i.e., generally federal treasury bonds are tax free at the state and local level.
Money market funds that are backed by U.S. Treasuries also accomplish the same goal.
How does one buy a Treasury bond or money market fund?
Treasuries are securities that need to be purchased in an investment account. What we generally do to help people take advantage of these interest rates, is open an investment account and create a direct link with their checking account. In this way, we can easily send money back and forth if you ever need to use the money for a purchase. With this setup, you get the best of both worlds: (1) Ability to take advantage of higher interest rates with your excess cash and (2) Ability to easily move the money back to your checking account as needed when they mature.
Break free from the near-zero interest you are earning in your bank account. There are other options that can make a difference whether it be with your rainy day fund or your excess savings.