Your Cash Could Be Earning You More Income

| October 27, 2022

With interest rates rising, your cash holdings could now earn you some interest income.

Again, they could—but they may not be doing so. Many financial institutions are not passing along higher interest to customers holding cash. You should check to see how much your money earns, and if it’s a pittance, look at some alternatives.

Here are some ways to earn interest income…

In recent months the Federal Reserve Board has aggressively increased its target rate. The rate currently stands at 3.25%. The fed funds rate provides a base rate for short-term loans. For example, the three-month T-bill yields 3.95% at Charles Schwab.

Yet many financial institutions haven’t increased the rates they pay on savings accounts. They continue to pay near-zero rates that resulted from meager market interest rates in years past.

I have quite a lot of cash in a business savings account at my credit union. That money continues to earn the measly 0.10% that has been the rate since I opened the account five or six years ago.

I looked at Bank of America’s savings rates, but they’re even worse. They pay 0.01% to 0.04% on savings accounts and just 0.05% on a 7-month CD, the shortest term they offer.

I have most of my investment portfolio with Charles Schwab. They currently pay 0.40% on cash balances. It’s better than $0.10%, but still pretty meager.

As an alternative to earning nearly nothing on your cash, look for money market mutual funds and bank money market accounts. It’s important to understand the difference between the two types of investments.

Money market mutual funds invest in short-term liquid securities such as Treasury bills or corporate commercial paper. These funds earn short-term market rates minus a management expense. For example, the Fidelity Government Money Market Fund expenses are 0.10%. Net of fees, the fund has a current yield of 2.49%. A money market mutual fund will have a stable $1.00 share price.

Money market savings accounts are FDIC-insured bank accounts. The banks set the yields, which vary widely from bank to bank. You can find accounts paying almost nothing up to around 3.0%. To take the bank path, you need to shop around and be willing to send money to banks with which you may not be familiar.

Your brokerage account may allow you to sweep all cash into a money market mutual fund. Fidelity does that, and it is a nice feature. Charles Schwab does not, so you must manually buy and sell shares if you invest with Schwab. The Schwab Treasury Obligations Money Fund yields 2.76%, which can be worth the effort.

Now that we have interest rates above one percent, you can pick up extra earnings by ensuring your cash holdings earn interest. The 2.5% to 2.8% current paid by money market funds will increase as the Fed continues to increase interest rates.

This post originally appeared at Investors Alley.

Category: Personal Finance

About the Author ()

Tim Plaehn is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory delivering income investments with double digit growth in share price and dividend payments. Tim’s also editor of Weekly Income Accelerator, a covered call trading service, and Automatic Income Machine, a dividend growth service focused on growing your nest egg.

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