In today’s financial climate, understanding where to keep your hard-earned cash can make a notable difference in your wealth-building journey. While stockpiling cash reserves in traditional checking and savings accounts has been the norm, currently elevated interest rates invite us to consider alternative savings options.
The State of Checking Accounts
According to the FDIC, the national average interest rate for checking accounts is a mere 0.07%. However, low rates on checking accounts aren’t unusual.
Rates have remained relatively low over the years, irrespective of fluctuations in the broader economic environment. That’s because banks traditionally profit from the differential between the low interest they pay on deposits and the higher rates they charge on loans.
Besides profit margins, factors like operational costs, cash reserve requirements, and the low-risk nature and accessibility of checking accounts contribute to their lower interest rates. Fortunately, there are other places to store your cash.
The Appeal of High-Yield Savings Accounts
Unlike traditional checking accounts, High-Yield Savings Accounts (HYSAs) at online banks are currently offering more generous yields—on average, between 4.35% and 5.15%. The absence of traditional brick-and-mortar expenses allows these institutions to offer higher rates, providing a more lucrative home for your cash savings.
Money Market Mutual Funds: A Closer Look
Money Market Mutual Funds (MMMFs) offer a blend of accessibility and enhanced interest rates, currently between 5% and 5.30%. However, while MMMFs allow for the swift movement of funds, it’s crucial to remember that they aren’t FDIC insured.
Rather, these accounts are often protected by SIPC coverage up to $500,000, including a $250,000 limit for cash, within a SIPC-member brokerage firm. Yet, it’s important to note that this protection doesn’t cover market losses, underscoring the need to consider the inherent risks of market-based investments.
For tax-sensitive savers, municipal MMMFs can provide a route to tax-exempt income, depending on where you reside.
Certificates of Deposit: Locking in Rates
Certificates of Deposit (CDs) present an opportunity to secure a fixed interest rate, with 1-year CDs currently offering between 4.76% and 5.67%. While CDs lack the liquidity of HYSAs and MMMFs, they shield against declining rates, ensuring a steady return for the deposit term.
Making Your Cash Savings Work for You
Let’s put this into perspective. Suppose you have $20,000 in a checking account, earning 0.07%, or $140 annually. Moving this to a savings account yielding 5% would make your potential earnings $1,000 a year.
After taxes, assuming a 24% tax bracket, that’s $760 net compared to $106.40 from the checking account. The difference is clear.
To maximize your earnings on cash, staying current with the most competitive rates is key. Trusted financial websites like Bankrate.com, NerdWallet.com, and Investopedia.com offer valuable comparisons and insights. In addition, checking the FDIC or SIPC status of the institution where you plan to deposit funds is essential.
Remember, your cash doesn’t have to sit idle. By being proactive and informed, you can make strategic choices that align with your financial goals and comfort level with risk.
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