It’s been years since being a saver has paid. With the Fed aggressively raising rates over the last year, now there are opportunities for those holding onto cash. If you are like those polled by the WSJ, many large bank customers are missing out on an estimated $42B of interest income every quarter.
Beyond banks, financial institutions like Fidelity, Schwab, Goldman, etc., have higher interest-bearing accounts. In addition, you might find even higher interest-bearing accounts through online lending institutions or a broker like www.maxmyinterest.com. I personally am not a fan of online financial lending services organizations as I like to call my banker or advisor. It’s still money. And for me, there is a strong connection between money and people –they go hand-in-hand. However, that is just me.
Listen, if you are a saver, you are already an investor. Your first investing relationship is with your bank. You are essentially loaning the bank money so they can do business with their customers. Think of it as an interest-only loan receivable, and your terms allow you to call back the money at any time and without notice to the bank. High interest-bearing accounts are an excellent option for money when you don’t have any other favorable investments.
The Business of Banking:
In exchange for depositing your money, the bank has a liability on their books which will pay you interest -- a cost of doing business. The bank will, in turn, use your funds and turn around and make loans at higher interest rates. The difference between what they pay you and what they collect in interest is part of how they make money. This is called net interest margin.
Now, banks are limited in the amount of loans they can make based on their reserve ratio requirements set by the Federal Reserve -- the central bank of the United States. The Fed is responsible for implementing monetary policy to achieve its objectives of full employment, stable prices, and moderate long-term interest rates. One of the ways they help influence that objective is to set the reserve requirements for banks. Reserve requirements are the amount of money banks must hold in reserve. Here is a page from the Federal Reserve to learn more.
This is a fractional reserve banking system. Banks are required to hold only a fraction of their deposits in reserve (usually as cash) while lending out the rest. As a result, banks can create new money by issuing loans and creating deposit accounts for borrowers, allowing for more economic growth and development.
What’s the implication for you?
I hope you can see that your hard-earned savings play an important role in the economy. It’s worth a lot more than you think. So demand market rates of interest for the cash you are holding. Think of it as a loan receivable. You would not be charging a big bank next to nothing for the money you are lending them. Would you?
Next Steps:
Start looking at all your bank accounts and add up what you have already sitting in cash. You may be able to consolidate and get better rates depending on the banking product and the minimum deposit required. There are several options available beyond a high-yield savings account. So talk to your advisor or banker to learn about your options.
Also, be on the lookout for my paid newsletter coming out soon, where I curate educational material so you can read and take action as a DIY.
Things to Consider:
Individual Saver – review what you are making now in a low-yield account vs. safe other financial options (FDIC vs. Non-FDIC Insured). Calculate the amount of money are you leaving on the table. It might inspire you to take action.
Small Business Owner – if you are good at managing your accounts receivable, get paid on retainer or in advance, consider your options for your cash you worked hard to secure.
Non-Profit Leaders – if you are fortunate enough to have significant financial resources, look at your investment portfolio. Ensure you are not taking on unnecessary risk relative to FDIC-insured or low-risk options for cash you need in the next year or two for grantmaking.