Please note, this blog was originally posted on my personal site (www.TydlaskaCFP.com) back on 9/18/2015.
While I have heard variations of this quote many times, the underlying message is the same: You should have your money working hard for you so it can multiply and bring you more wealth. But how do you do that when the Fed refuses to raise interest rates? Below are a few strategies I use to manage my cash to earn a high interest rate while still maintaining liquidity.
Please note, I do not get any kick backs or earn any money if you sign up for these accounts. I just think these are great products.
The foundation for any solid personal financial plan is to have 3-6 months worth of living expenses set aside in an emergency fund. This will protect you in case you lose your job, need to repair your car, or you want an f***k you fund to be able to quit your job and take a sabbatical. For my emergency fund, I like keeping my money as liquid as possible, so I put in a checking account. I like the Charles Schwab High Yield Checking Account for the following reasons:
- 0.06% interest rate as of 9/18/15 (my bank pays me for my checking account!!!)
- Free checks
- You can deposit checks through their app on your phone
- You can use any ATM worldwide and they will refund you for ATM fees (even in Vegas where withdrawal fees can top $9.99)
- No account minimum
- No monthly service fee
- Free Visa Platinum debit card
Schwab is able to offer you all these services because they keep their expenses low by not having any physical bank branch locations. Interestingly, as more and more bank services are conducted online, brick and mortar locations are shuttering their doors, including 300 JP Morgan Chase and 500 BofA branches. Without the expense of physical branches, online banks are able to pass savings on to you, and while 0.06% isn’t much, it is better than an account that charges you money, requires a direct deposit, or mandates a minimum balance. For example, unless you have a direct deposit of $250 or more, BofA charges $12/month for their basic Core checking account.
The only major drawback to a Schwab account is when I need to deposit a large sum of cash. Over the years, my wife and I have held fundraisers for the Susan G. Komen 3-Day walk for the cure. As part of the fundraiser, we charge admission for a wine tasting party, conduct a raffle for great prizes, and hit the streets/local bars with pink buckets asking for donations. One solution to deposit a large sum of cash like this is to go to a local bank (like BofA, Wells Fargo, or a credit union) and ask them to write you a cashier’s check. They are normally happy to do this for a nominal fee (my local credit union charged me $4.00 for a cashier’s check). Alternatively, you could have a friend or family member deposit the cash in their account and write you a check (thanks mom!).
Goals and Dreams:
For money you plan to use within the next 1-2 years, I recommend setting up "escrow" accounts, aka individual accounts, and earmarking them towards a specific goal or dream. I currently use Capital One 360 Saving’s accounts for a few different savings goals (vacation fund, dream house fund, and new car fund) and it is easy to set up and name each account. I like these accounts for the following reasons:
- The interest rate is 0.75%, which is 12.5 times the national average of 0.06%
- No fees
- No minimum deposit required
- If you sign up for an account by 9/30/15, you can earn a bonus of up to $500 (click here to see how you can earn an effective APY of 4.84% with this account)
- FDIC insured up to $250,000
However, one downside to an online savings account is it takes a few days for the funds to transfer from your Capital One account to your checking account. This shouldn’t be an issue because normally you plan ahead for major purchases. It isn’t like you go out and buy a house on a whim. Also, if you follow the advice above, you will have 3-6 months worth of living expenses in your checking account for any unexpected cash needs.
Nerdwallet and Bankrate.com compile lists of other high-yield savings accounts that may offer higher rates. But I have found Capital One 360 to consistently stay in the top range of interest rates over time, while other banks tend to have rates that move around and may require a minimum balance.
Now that you are armed with this information, get your money working for you so it can bring home some prisoners!
Do you have any favorite savings or checking products? Please share them in the comments below.
Views expressed in this post are that of Shawn Tydlaska, CFP(r), MBA. Shawn is a Certified Financial Planning pro and graduated from University of Michigan Ross School of Business. This blog is for informational purposes only and should not be considered a recommendation or endorsement to a particular investment or strategy.