Have you noticed your grocery bill creeping higher lately? I am pretty mindful of my spending and don't mind throwing down for dinner at a nice restaurant, but even ordinary, everyday expenses have been surprising.
Rising inflation rates have been all over the news lately and, while most of the consequences of high inflation are bad, there is one silver lining: the amount you can receive for saving cash is actually meaningful for the first time in years!
The rates that banks paid on individual accounts were so low for so long that they barely figured into most people's decisions. Sure, a savings account was a good place to keep money in case of an emergency or for short-term goals (like a vacation or house downpayment), but actually earning a decent return with interest rates around 0.01%? Forget it! With rates for certain accounts now approaching or exceeding 4%, though, that has all changed.
For example, retirees typically rely on income-generating investments to cover expenses. With cash accounts now paying around 4%, the need to take on market risk (i.e., investing in stocks) in order to maintain income is lower – and the same result with lower risk is always better!
Or consider some money set aside for a house downpayment – let's use $10,000 as an example. With interest rates at 0.01%, that $10,000 would earn about $1 per year – including the effects of monthly compounding! At a 4% interest rate, however, this potential homebuyer can earn around $407 per year once compounding is factored in. Not bad!
Looking for ways to earn a little more money on your cash? Banks that rely on individual account holders – like local banks, credit unions, and online-only banks – are more likely to pay higher interest rates on FDIC insured savings accounts. Giant multinational banks rely much less heavily on individual savers, so their rates tend to be lower (the Chase website still lists 0.01% for my ZIP code).
If you are comfortable with a non-FDIC insured money market account, many banks, brokerages, mutual funds, and Exchange Traded Funds (ETFs) may offer a little more interest than traditional banks in exchange for taking on a little more risk.
Want to discuss what role cash should play in your portfolio (or even everyday life)? Schedule a quick call with me using this link.
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial futures. As both advisor and accountability partner, we help identify current strengths and weaknesses, clarify and refine your long-term goals, and prioritize understandable, manageable, and repeatable actions to bring long-term financial well-being. Reach out today to take the first step.