By John Drachman
While he makes a decent living as a marketing VP, Larry never considered himself rich. Then Covid-19 hit.
Now, Larry’s company is managing perfectly well with most of its professional employees working remotely – and suddenly Larry has never felt wealthier in his life.
In addition to the stimulus payment he received last spring – and really didn’t need – Larry hasn’t been doing more than a little online shopping. Since spring, his dollars have been effortlessly piling up. The monies that used to vanish into his nights out with friends, three day weekends, commuting to work and restaurants are now stubbornly out of circulation.
And Larry is not alone. In August 2020, the personal saving rate in the United States amounted to 14.1 percent, down from a high of 33.7 percent in April – and almost twice the 7.6 percent rate from 2019, according to Statista Research.
However, as Larry’s idle cash snowballed he started to fret. Even in the current low interest environment, he felt his short-term money market yield was just too low. Unsure of whether he should park his money or invest, he surveyed broker-dealers to see if he could figure out where to park his cash. His financial professional advised him to do his homework:
- Know Your Fees: Reading the fine print is a must.
- Compare Features: Compare apples to apples and Annual Percentage Yields (APY) to other APYs.
- Know the Transfer Policies: Most small business owners, for example, like the assurance of knowing they can make transfers daily.
- Automated Transfers: This is particularly helpful for people like Larry who are looking to dollar-cost average into other investments at some point.
Meanwhile, interest rates in the United States tread water at historic lows. The Federal Reserve’s recent 0.25% interest hikes had little effect on brokerage interest rates. Those brokerage accounts though with the highest interest rates on recent cash balances in 2020 include:
- M1 Finance offers a checking account that comes with 1% APY. However, checking, which is part of the broker’s M1 Plus program, costs $125 a year.
- The highest brokerage firm interest rate on FDIC insured cash is currently 0.6% Annual Percentage Yield (APY) for online savings account available at Ally Invest through its parent company Ally Bank.
- From here, yields go downhill quickly. JP Morgan Chase offers an account yielding 0.01% – 0.11%; while Schwab’s dips to the 0.01% – 0.05% range.
While opening up a traditional account today may provide a fairly anemic APY, online savings accounts are generating between 1.70% and 1.90% APY. On an account balance of $10,000, that can mean a difference of several hundred dollars more a year in interest income as detailed in MPFA’s perspective on digital banking in Want Higher Yields from a Safer Distance? Remember, a brokerage money market account is only one step toward a comprehensive financial strategy. Then, when you’re ready to consider the “bigger picture,” consider working with a financial advisor. Those who did had a higher level of confidence in their longer-term financial outlook.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors .John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.
