Waldron column
About 10 years ago, I worked in a branch at a large bank where I discussed interest rates with retail bank clients in some way, multiple times a day, every day. It was an interesting time – and not only because it’s a workplace that future (and maybe current) generations will find obsolete. It was because my time there came just after the 2008 financial meltdown, and interest rates were at their lowest point in a time of exceedingly low points.
Over the past decade, federal funds have steadily increased and Applicable Federal Rates are approaching what we might consider a normal level again. Your own variable interest rate loans have probably risen right alongside them. Credit card companies have not hesitated to hike your rate even days after federal funds make a jump, and if you get a mortgage today, your rate will probably be at least a point greater than it would have been only a couple of years ago.
With all of these increasing rates, is your savings account keeping pace, too? Probably not, with most of those rates, particularly in brick-and-mortar banks, hanging below 2 percent. Many banks offer high-yield savings accounts, but they generally require minimum deposits and typically only pay the increased rate up to a certain dollar amount – usually, $25,000-$50,000 – before the rate drops. That doesn’t mean there still aren’t good, hassle-free options for those who have a significant amount of cash in savings or money market accounts. It just takes a little awareness and some digging to find better rates and get an improved return.
Why so low?
For years, low interest rates put the pinch on banks, as the institutions harvest more money from investing customers’ cash than the amount they pay back to customers in interest on a savings account. When rates are low, so is a bank’s margin.
When federal funds increase, it’s simply better business for banks to keep deposit rates low while increasing loan rates. It’s not, however, better for customers, and they might not realize it’s even happening. For example, I had a prospective client who had $20 million in cash sitting in a commercial bank, earning 1.45 percent interest. There was a lot of potential money he was missing out on, and though the yield from his savings clearly wasn’t going to be his primary income, there were many easy-to-find banks offering better rates.
What are my other options?
While the majority of brick-and-mortar banks are keeping their rates low on savings, there are definitely a handful of companies, led by those that primarily do business online, going against the norm. Banks such as Barclays, State Farm, Discover, TIAA and Goldman Sachs have online savings accounts with rates that have gone up in tandem with federal funds. Most of these are paying out around 2.10 percent to 2.45 percent (as of this article’s published date) and, importantly, have no lock-ins, annual fees or minimum balance requirements that other banks might attach as conditions to qualify for a higher savings rate.
Money market funds offered through major brokerage firms also deserve attention, as customers might be able to find better rates that aren’t immediately available. Most major brokerage firms almost always deposit funds from dividends or interest payments into a regular cash account, unless they are marked for reinvestment. We find that investors often have a substantial amount in these money market accounts, but the balances are still not yielding a high return. That’s one of the ways these firms make money – by parking your cash in low interest rate-bearing accounts and collecting the spread. Meanwhile, the same companies likely have a higher-rate money market account available. They just won’t give it to you by default; you have to inquire further, or your advisor needs to proactively bring these issues to the forefront.
What should I be doing now?
If you aren’t already, you should be getting at least a 2 percent interest rate in a taxable savings account. The short-term AFR (1-3 years) as of April 2019 is 2.52 percent, so if you can get a government-backed security at that rate, you should be able to get at least 2 percent in your bank account.
For those in a higher tax bracket, there are also municipal money market funds where you can get a rate around 1.4 percent – about the same as what you might get from a bank on main street – but it’s tax free. If you’re in a 37 percent tax bracket, that’s a big deal. It’s worth noting that money market funds held in a brokerage account are not FIDC insured, so there is inherently more risk than a money market bank account. In my opinion, it’s a small risk and a moot point if your cash is over the $250,000 per person, per institution limit.
Ultimately, if you have a substantial position in cash, it’s worth your time to take a look at the level of interest you’re getting and understand you have options that won’t cost you a dime – they will only generate more money. Typically, if you’re not asking about ways to get higher rates, a bank employee won’t tell you about them because that’s a non-revenue-generating conversation for the institution.
Finding better rates is as simple as comparing them using online tools or asking your advisor. Either way, it’s not too late to take advantage of the decade-long trend of increasing interest rates to make the most of your savings.