Is Your Bank Underpaying On Your Savings?
Even as the stock market makes new highs, more cash is held uninvested than ever before. As the chart below shows, just over 6 trillion dollars is held in cash-like Money Market Funds.
The growth isn't surprising given yields on cash-like Money Market Funds are higher than ever.
However, don't assume your cash receives a higher rate. Many bank checking and savings accounts still pay close to 0%.
The good news is that underpayments can be fixed. Competition among banks is active enough that a quick phone call to the bank can often increase the rate you receive. Ideally, you can receive a higher rate without changing the account, product type, or making any other changes. Ask, "Should I be receiving a higher rate in my current account?". If the rate doesn't change, consider if you can pursue a stronger rate while still keeping your costs low and your money safe.
How close to today’s 3-5% potential rate is your cash paying?
Make sure your cash isn’t being left behind. Review your cash accounts today.
Savings Versus Money Market Accounts
We should all aim to stash away some cash for easy access. To do so, we commonly turn to the account options provided by local banks and credit unions.
While good options are available across the US, and especially online, attractive savings rates are a fairly recent development. Throughout the 2000s and 2010s, rates trended low—nosediving after the 1980s and 1990s.
Currently, the national average rate for savings accounts is still just 0.46% (FDIC, as of February 20, 2024).
While you can find high-yield savings accounts that offer 10 times the national average, it’s important to be aware of all your options, including cash-like money market accounts (MMA). Note: Open Window uses MMAs, but does not sell MMAs. In fact, we don't sell any accounts or securities. We're licensed to provide fiduciary advice, not to sell products.
What is a Savings Account?
Just as it sounds, a savings account is a bank account specifically used for saving money. Because these accounts are designed to house money on a more medium-term basis, they can offer (but are not required to offer) a better interest rate than checking accounts.
To access the money in your savings account, you will typically need to visit a bank teller or use your online banking system. Savings accounts are not usually accessed through the use of checks or debit and ATM cards. Instead, it is common to link a savings account to a checking account, where these methods of withdrawal are more easily utilized. In fact, Regulation D limits users from withdrawing money from their savings accounts to no more than six times per month.1 Attempting to withdraw more than six times could result in penalty fees or account suspensions.
For many, a savings account provides cash available to cover unexpected expenses such as a sudden car or home repair. Savings accounts can also be used to set aside cash for medium-term goals and expenses. Examples include expenses that may occur several months into the future, such as holiday expenses and upcoming vacations.
What is a Money Market Account?
Think of a money market account as a hybrid between a checking and savings account. While an MMA still offers easy access and withdrawal capabilities and is still under the same regulation by the SEC in regard to withdrawal limits, many MMAs can be accessed using checks or ATM cards.
For many, MMAs provide accessible cash for medium or long-term goals and expenses that are anticipated one to five years into the future.
The biggest difference between an MMA and a savings account is the interest rate. Generally speaking, MMAs offer a higher interest rate than a savings account. This higher interest rate is possible because your deposit is invested in short-term debt instruments such as U.S. Treasuries, commercial paper, and certificates of deposit (CDs).
However, you'll need to choose your MMA carefully:
Currently, the national average rate for MMAs is still just 0.66% (FDIC, as of February 20, 2024).
Which is Right for You: a Savings Account or a Money Market Account?
While savings accounts and MMAs are similar in nature, there are a few other key differences to consider.
While the higher interest rates of an MMA may be appealing, you want to be sure to maintain any minimum required amount in the account. If this causes concern, you may want to set aside what you have in a savings account instead.
We encourage clients to use both savings accounts and MMAs. What we see working well is a mixture of three primary cash accounts: one checking account, one savings account, and one money market account.
The cash balances you choose to keep in these three accounts highlight another important difference: your status as "retirees", or as those "not yet retired".
Retirees
Retirees typically need to rely on their cash savings to meet living expenses. Therefore, they may consider keeping very little in a checking account, a healthy balance in a savings account, and up to one to two years of living expenses in a higher-interest MMA.
Not Yet Retired
Those who are still working tend to rely on their earned income to meet living expenses. Since they don't need to rely on withdrawals from their cash savings as heavily as retirees, they may consider limiting their savings account balance while favoring a higher-interest MMA.
Just like retirees, those "not yet retired" should consider limiting their checking account balance due to the usual lack of interest paid, and security concerns.
Let Us Personalize These Ideas For You
As you look to manage your cash, it’s important to weigh all of your options. Remember to consider the interest rates, minimum requirements, and accessibility differences between your savings and MMA account options to find what works best for you and your savings.
Reach out to us anytime at (775) 827-0670 or schedule a Quick Connection with us at www.openwindowFS.com/connection.