Where is your cash and why it matters

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When I am working with new clients, one of the first steps in the financial planning process is getting organized. This means we take an accounting of all the assets, liabilities, and income. After going through this process with many families I can tell you that one very common attribute is that people have too much uninvested cash. Today, this can be costing you significantly in missed interest, and there is no reason for it.

Currently the average yield on savings rates at the major banks is 1/10th of a percent, or .001%. That means on a $50,000 account balance you earn roughly $50 in interest in year. Granted if you put your money into a money market or a certificate of deposit (lock up periods apply) you will earn slightly more but still on the very low end of available yields.

Why is the yield so low? It won’t surprise anyone that as interest rates in general have gone up the big banks have been very reluctant to pass that increase yield onto consumers. A large part of any bank’s profits is the spread between where they loan money – mortgage, credit cards, etc. – and what they pay people to deposit money. The wider the spread the bigger the profit.

The good news for savers is that there are plenty of alternatives out there that are paying much higher interest on cash holdings, and the difference is high enough to make it worthwhile to be a little proactive. Currently there are multiple, well-known institutions that are paying over 2% on cash holdings. At 2% that same $50,000 account would earn $1,000 in interest a year, or $950 more than at one of the big banks. That is meaningful money and making those type of smart money moves regularly makes a big difference in your long-term financial health.

Of course, there are many issues to consider when opening a financial account. For your cash holdings you want to have a good understanding of the protections available – is it FDIC insured? – and the logistics of moving money in and out of the account. Also, there is the question of how much cash do you need to keep on hand in the first place. Every person and family is different but usually it is not as much as you think.

I help clients work through these issues and many others, so if you have questions let’s talk. I can also point you in the right direction of some really great accounts for your cash holdings.

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