What goes into a good active savings strategy?

A headline passed across my Twitter feed yesterday that seemed like a good bank account signup bonus: “$500 Bonus for New Money Market Account at Capital One.” $500 is a lot of money, so I clicked through to check out what the requirements were. As usual, there were some deposit requirements, in this case a $50,000 deposit of outside money, held in the account for 6-8 weeks (until the signup bonus posts). $50,000 is a lot of money, certainly more money than I have, so I moved along.

But, a few hours later, I circled back and started thinking: what is the right way to think about these signup bonuses, and how should you incorporate them into an active savings strategy?

How much cash do you have, and why?

I love cash. It’s considered fashionable among some financial advisors to talk about how your cash is constantly losing its value due to inflation, it’s not earning a high enough rate of return, it’s not backed by gold, whatever. But actual people understand the great thing about cash is that it’s cash. You can use it to buy things, you can give it away, you can invest it, you can do anything you want with it! Cash is great, and anyone who tries to convince you cash isn’t great is probably trying to sell you something.

But as great as cash is, it isn’t everything. On the contrary, cash is always and everywhere a substitute for something. If you have a mortgage, car loan, or credit card debt, cash is a substitute for paying down those balances. It might be a good substitute (you might be able to earn more on your cash balances than your current mortgage interest rate) or it might be a bad substitute (unless you have a promotional rate, your credit cards are probably charging more interest than what you can earn on cash deposits). Likewise, up to the relevant balances, cash might be a good substitute for short-term bonds, but a bad substitute for long-term stock investments.

How active is your active savings strategy really going to be?

It doesn’t matter how lazy you think you are, it matters how lazy you actually are.

Consider the Capital One money market account I mentioned above. It offers a $500 bonus after 8 weeks, and 1.85% APY, which roughly works out to the equivalent of 8.35% APY for the 8 weeks it takes the bonus to post — a high interest rate by anyone’s standards. However, it only offers that interest rate for 8 weeks. If you leave your money there for 16 weeks, your blended APY will be 5.1%. At 24 weeks, it’ll be 4.01%. If you leave it there for a full year, you’ll earn just 2.85% APY.

Commenter Kim pointed out last week that Heritage Bank’s eCentive account earns 3.33% APY on balances up to $25,000 (she also said she had three of them), while my favorite Consumers Credit Union rewards checking account earns up to 5.09% APY on up to $10,000 (starting in October).

In other words, if you only muster up the initiative to actually move your cash savings or your direct deposit from bank to bank once per year in order to trigger a bonus, you’re probably earning less than if you simply sat on the cash in the highest-earning accounts you have access to year-round!

Where are you getting the cash?

One tempting option is to say that instead of having a pool of cash you’re constantly chasing bank account signup bonuses with, you’re going to selectively target just the highest signup bonuses that come around.

While it avoids the problem of decaying interest rates I described above, the problem with this strategy is that the cash still has to come from somewhere. If you already have a large cash balance, then the problem is easy to solve by moving the cash from one account to another and back again, but in that case your profit is only the difference between the bonus-inclusive APY and the basic interest rate you earn year-round. That may still be worth doing on a case-by-case basis, of course.

Alternatively, you could combine chasing signup bonuses with a more comprehensive strategy of harvesting losses in taxable brokerage accounts. If you have a taxable portfolio with $50,000 in assets showing a loss, then you can sell those assets, realizing a deductible loss, then instead of immediately reinvesting the assets, deposit them in bank accounts offering the highest current signup bonuses. Since bank account bonuses typically take at least 30 days to post, this is also a convenient way to avoid the “wash sale rule,” allowing you to reinvest your cash into the same investment you had originally sold (just be careful that ongoing contributions aren’t being made to that investment or you’re going to run into all kinds of trouble come tax time).

Finally, you could borrow the money to chase bank account signup bonuses. While this may or may not be more expensive than the other two options, it’s not strictly speaking “riskier.” The simplest example would be funding a new account using a credit card, waiting for the bonus to post, then paying off the credit card with money from the same account. A more complicated option, popular back when money market accounts were paying 6% APY or more on liquid deposits, is to open a credit card with a 0% introductory APR and no balance transfer fees to spin up lots of cash that can be invested across a variety of accounts for the entire introductory period.

Conclusion

I love robbing banks and encourage anyone and everyone to get in on the action to the degree it makes sense for them individually. However, there are real risks to trying to dive into the signup bonus game without thinking through a strategy ahead of time:

• how active are you willing to be? The less work you put into your bank account signup strategy, the more your lived interest rate will decay compared to the advertised rate.
• how much is your cash costing you? Do you have other debt that cash could be used to pay down at a higher interest rate than a bank account signup bonus earns?
• are you integrating your cash holdings into a comprehensive investment strategy? If you have $100,000 invested in a 60/40 equity/fixed income portfolio and another $50,000 held in cash, you have just 40% of your investable assets in equities. Does that correspond to your long-term investment goals?

Once you’ve answered those questions to your satisfaction, there really are opportunities to get outsized returns on short-term deposits, and those opportunities are well worth considering.