- Interest rates are higher than they have been in recent years, and so are your potential cash returns.
- It’s changing the conversation between financial advisors and their clients.
- These experts argue that individual investors should be mindful of the amount of cash they currently hold.
Xavier Lorenzo | Moments | Getty Images
Not so long ago, it was common for cash returns to be as low as less than 1%.
But that all changed after the Federal Reserve began a series of interest rate hikes to curb inflation. Currently, investors can earn up to 5% or more interest on their savings. This is the highest amount in about 15 years.
“What I hear from advisors these days is, ‘This is real money,'” said MaxMyInterest, head of partnerships and business development at MaxMyInterest, a company that works with advisors and consumers to identify the highest interest rates for cash. , says Michael Halloran.
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Heather Ettinger, chairman of Fairport Wealth in Cleveland, Ohio, said that when interest rates were low, cash was an afterthought in the screening process with clients.
“Now when I look at the numbers, I’m like, ‘Oh, it’s not bad to have money,'” Ettinger said.
The more cash you have, the more interest you can earn.
An investor with a $1.5 million or $2 million portfolio could have as much as $300,000 or $400,000 in cash, Halloran said. At 5%, from $25,000 per year he could earn $30,000. The total could reach $300,000 over 10 years, he said.
Even a small amount of cash can yield meaningful returns. Steve Steges, president of customer service at The Colony Group, which has offices in multiple states, said a $50,000 cash reserve earning 5% interest would generate $2,500 in interest income over the course of a year. Point out that you can get it.
But all savers can make the same mistake of not keeping their money in the accounts that give the best yields.
A Bankrate survey earlier this year found that only one in five savers had a competitive interest rate of 3% or more on cash.
Only 31% of people with incomes of $100,000 or more earned at least 3% of their income in cash.
But savers in that income bracket are most likely receiving higher interest rates. Only 19% of savers with incomes between $80,000 and $99,999 earn more than 3% from their savings, while 22% of those with incomes between $50,000 and $79,999 earn less than $50,000. Among savers, it was 17%.
“We have a $17 trillion industry here, and almost all of this cash is lying in the wrong places,” said Gary Zimmerman, CEO of MaxMyInterest.
Experts say this is a problem that savers need to address.
“Every investor should put their savings to good use,” said Max Lane, CEO of Flourish, a fintech company that offers money management products to advisors. Ta.
“There’s no reason someone can’t get at least 4% at this point,” Lane said.
Here are some cash mistakes that financial advisors say investors should avoid.
Many savers may know they get better interest on their money, but it’s all too easy to do nothing.
“Inertia is one of the most powerful forces in nature,” says Tim Harrington, certified financial planner and founder of Longview Financial Advisors, based in San Rafael, California.
Harrington said he was trying to explain to savers who have large balances in low-interest accounts that their spending power is waning over time.
A brick-and-mortar bank may offer 0.25% interest on savings accounts, but inflation is 3.2%, based on the latest consumer price index data.
“You should do some research,” Harrington said.
Some people may want to hold cash to monitor market trends. Harrington said they often look back and realize it was a stupid deal.
For example, if you had invested that money in the S&P 500 instead, it would have gained more than 15% this year.
He said funds earmarked for long-term goals should always be invested in the market. Cash is good for emergency funds and other short-term goals with a timeline of less than five years.
But some investors may be reluctant to hold on to cash because of the security it provides.
“Your intuition is usually the opposite of how you should invest,” Harrington says.
Flourish’s Lane said if you have a financial advisor, you should talk to him about all your cash savings. Financial advisors tend to assume they control all of their clients’ money, but no financial advisor actually does, Lane said.
For the first time since the 2008 financial crisis, savers are questioning whether their cash balances are fully insured after the Silicon Valley Bank collapse. If the financial institution with which they keep their money is insured by the Federal Deposit Insurance Corporation, the answer is generally yes. , or FDIC.
However, their protection has limits. Depositors generally receive up to $250,000 of compensation through the FDIC per bank and per account ownership category.
When banking problems arose earlier this year, the federal government stepped in as a backstop despite these restrictions. But savers shouldn’t expect the same thing to happen again, Steges says.
“I’m really conscious of how much I have and whether I’m over my limit,” Steges says.
Investors may be able to access additional FDIC coverage by opening more accounts with financial institutions, he said. Some platforms allow you to use multiple supporting banks to provide enhanced FDIC protection.
It’s important to know whether your institution offers FDIC protection, what your personal limits are and whether they exceed them, and if so, you have options to address them, he said. Ta.