As I wrote last month, my favorite high-interest checking account, the Free Rewards Checking account from Consumers Credit Union, has dropped the maximum balance eligible for their highest interest rate tier from $20,000 to $10,000 (while raising that rate up to 5.09%). While the account is still more than worthwhile (it also offers unlimited worldwide ATM fee reimbursement), there’s no reason to hold more than $10,000 in your account anymore, which means you may suddenly have some extra underperforming cash lying around.
Here are a few suggestions for what to do with it.
Kasasa Checking
I’m not going to lie and say I know exactly who or what a Kasasa is. If I had to guess, I’d say it’s a way for smaller banks and credit unions to pool their deposits and earn higher interest rates on them, part of which they pass along to their depositors in the form of higher interest rates.
How high? This high:
- First Financial Bank: 4.07% APY on up to $15,000
- Park City Credit Union: 4% APY on up to $10,000
- Marshall Community Credit Union: 3.75% APY on up to $15,000
- Leighton State Bank: 3.56% APY on up to $15,000
- Texomo Community Credit Union: 3.51% APY on up to $10,000
- One American Bank: 3.5% APY on up to $10,000
All these accounts have slightly different calendar schedules and monthly requirements for triggering their interest rates, so be sure to read through the requirements carefully to make sure you will be able to trigger the advertised rates before opening an account.
Other Rewards Checking Accounts
Two additional non-Kasasa options are:
- Department of Commerce Federal Credit Union Performance Checking: 3.47% APY on up to $20,000
- and Heritage Bank eCentive Account: 3.33% APY on up to $25,000.
What to do with the rest of your cash
I love cash for its two great virtues: it doesn’t go down in price (although of course it may go down in value due to inflation), and it can be exchanged for goods and services. Those are virtues I’m willing to pay something for, but I’m not willing to pay an unlimited amount for. That’s why I would think twice before deciding to hold onto cash that was earning less than the 3.33% APY offered by Heritage Bank.
So, what are your other options?
- Certificates of Deposit. I’m not generally a huge fan of CD’s, simply because most people willing to apply a little elbow grease can get higher interest rates from rewards checking accounts. But if you’ve already exhausted the rewards checking accounts you’re eligible for, there are a few places you can get decent rates on CD’s. People’s Community Bank, United States Senate Federal Credit Union, and KS StateBank all offer medium-term CD’s paying between 3.37% and 3.63% APY.
- Pay down debt. If you financed a car or house at the depths of the Great Recession, you may well be paying less in interest than you can earn on the high-interest-rate accounts. But once your savings exceed the eligible balances on those accounts, you can convert your additional cash savings into savings on interest by aggressively paying down those loan balances.
- Low-cost bond funds. While I’ve been focusing on investments of cash that are federally guaranteed to maintain their value and liquidity, interest rates have gradually crept up enough that there are finally opportunities worth considering in the bond market. Vanguard’s Short-Term Corporate Bond Index Fund (VSCSX) currently has an SEC yield of 3.41%, their Intermediate-Term Investment-Grade Fund (VFIDX) yields 3.64%, and Intermediate-Term Corporate Bond Index Fund (VICSX) yields 4.08%. The essential thing to keep in mind when investing in bond index funds is the relationship between duration and return: an intermediate-term bond fund is more volatile than a short-term bond fund over the short term, which means its higher yield can be more than outweighed by its sensitivity to interest rates if you need to sell your shares within a year or two. If you need a short-term investment, you should buy a short-term bond fund!
Conclusion
No one of these options, or any one combination of these options, will be right for everybody. But it’s equally true that most Americans are not earning as much as they could be on their savings, and I’d like to help them get started.
Politicians often cast the failure of Americans to save as the fault of individuals for not making sufficient contributions to their workplace retirement accounts, or not saving enough in IRA’s, or HSA’s, or 529 plans. My Councilmember has an insane plan to encourage people to save by deferring their tax refunds and earning a “bonus match” or some such nonsense.
But it’s all ridiculous. What you need to do to make your savings grow is earn as much interest as possible on your savings. High interest rates encourage people to save, low interest rates discourage people from saving, and that’s the whole ballgame. If you save more money than everybody else, at higher interest rates than everybody else, you’ll end up with more money than everybody else.
So why not get started today?
Hello Matt:
Thanks for a useful post. Could you please answer two questions.
1) Suppose I have 25 years of mortgage left, with a fixed rate of 3.4%. If I pay some of the principal, the monthly payment will remain the same but the number of payment periods will be reduced to, say, 23 years. Am I right that if I am likely to move within 5 years it doesn’t make sense to pay the principal and it’s better to use a savings account even if the latter yields well below 3.4% ?
2) Could you compare high yield savings accounts with some low risk Roth IRA options. If it’s no brainer for you, please let us know what you think.
Nik,
Matt actually writes at saverocity.com/finance, this is a totally separate blog Matt kindly agreed to host for me! Still happy to answer your questions though.
Let me answer your second question first: there’s no reason to use a Roth IRA for “low risk” investments. It’s true that you can pull out your Roth IRA contributions and up to $10,000 in earnings for a first-time home purchase and for certain other purposes, so if someone were planning a first-time home purchase in the next few years they might want to move to stable, liquid investments within their Roth IRA. But since you already own a home, your Roth IRA and other qualified retirement accounts should be invested with your target retirement date in mind, or at least with age 59.5 in mind, since at that point withdrawals of earnings can be made tax-free in any case. In other words, you’d ideally invest your Roth IRA in whichever risky, volatile assets you expect to have the highest returns between now and your retirement. As I’ve written extensively before, the key advantage of IRA’s and 401k’s is the tax-free internal compounding they offer, so holding safe stable assets sacrifices the main advantage such accounts offer.
As for your first question, once you’ve opened a mortgage, i.e., you’ve already paid all the closing costs and are just paying principal and interest, then you should compare the interest rate on your mortgage directly with the interest rate on your savings, regardless of when you intend to move. Earning a high fixed rate on your savings and paying a low fixed rate on your mortgage creates an obvious opportunity for arbitrage, since you can use the “spread” between those rates to pay down the principal on your mortgage whenever you want, while preserving the optionality of keeping the mortgage depending on house prices and interest rates in your area.
There are a lot of moving pieces here, so if you’d like advice more specifically tailored to your situation, feel free to reach out to Matt through Guide Wealth Management: https://guidewealthmanagement.com/
—Indy