In a recent blog post, we shared some strategies for maintaining an emergency fund and reasons why you may not even need one at all. The downside of a large emergency fund is what’s known as “cash drag”—the very low (often negative) real rate of return on cash that drags down your investment portfolio’s overall rate of return. However, there are valid situations where a large position in cash makes sense. One common example we see with younger clients is money earmarked for the down payment on a house that they expect to purchase in the next 12-18 months. In cases like this, where you may need to park a large sum of money in cash, maximizing your return on cash can mean a difference of thousands of dollars. Read on to learn about a new service you can use that automatically helps you maximize your return on cash while also ensuring that all of it stays fully insured by the Federal Insurance Deposit Corporation, better known as the FDIC.
FDIC insurance protects your bank deposits (up to $250,000 per depositor, per account ownership category, per bank) from loss in the event of a bank failure. During the period of 2008-2012, there were 465 bank failures, but the FDIC insured over $478 billion in deposits among these failed banks. So, if you need to park several hundred thousand dollars or more in a cash account, then maximizing your return on this money while maintaining full FDIC coverage should be of interest to you. A new service called MaxMyInterest automates this process for you by monitoring interest rates across different high-yield bank accounts and moving your funds to the higher yielding accounts.
The first step after signing up for MaxMyInterest is to link your existing checking account and savings accounts to MaxMyInterest. You may choose to open up additional online savings accounts and link them as well (MaxMyInterest is compatible with most of the major online banks and has a common application you can fill out). You then select the level of cash to maintain in your checking account and MaxMyInterest will automatically sweep any excess cash into your savings accounts in a way that optimizes your interest while keeping all your money below the FDIC insurance threshold of $250,000 per account ($500,000 for joint accounts). If your checking account falls below a target balance, the service will sweep money back into your checking account by pulling it from the lowest paying savings account. MaxMyInterest even helps you come tax time by providing you with a consolidated 1099 form from all your bank accounts.
Minimizing “cash drag” on your portfolio is key, but when you must hold cash keep in mind that there can be a substantive difference in rates from different institutions. It is straightforward to compare and identify the best-paying banks, but rates change frequently as banks compete; staying on top of this does take time and effort. MaxMyInterest is a simple way to automate the process, and one that we think could be worthwhile for anyone who needs to hold larger sums of cash.
Questions about FDIC insurance or where to hold your cash? Give us a call or send us an email and we’d be happy to chat!