In this episode of Friends Talk Finanical Planning, Bridget Sullivan Mermel and John Scherer discuss smart strategies for parking your idle cash to ensure it's safe and earns a decent return. Whether you're dealing with an unexpected windfall, an emergency fund, or just trying to be smarter about your finances, we've got you covered!
Key Topics Covered:
- The pitfalls of keeping money in checking or low-yield savings accounts.
- The benefits of online savings accounts and what to look for.
- Insights on Treasury Bills, CDs, and other investment instruments.
- The importance of FDIC insurance and managing accounts over $250,000.
- Assessing the balance between convenience and maximizing interest rates.
- How to evaluate and choose financial products that fit your specific needs.
Links Mentioned:
- Ally Bank: https://www.ally.com
- Charles Schwab: https://www.schwab.com
- Alliance of Comprehensive Planners: https://www.acplanners.org.
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- John Scherer on LinkedIn: https://www.linkedin.com/in/johnmscherercfp/
TRANSCRIPT:
Bridget: One of the pieces of low hanging fruit in our industry is parking cash and making some money. So what do you do with amounts of money that you don't need right now that you can earn some money on, and you want it to be safe? Hi, I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And before we start talking about low hanging fruit, I want to remind everybody to hit that subscribe button. That helps other people find this information on YouTube. And with that, I'm looking forward to this. I've had a couple of discussions recently with both friends and clients about this idea. What do you do these days? What do you tell folks? What are your top ideas?
Bridget: Well, let's start with what's worst.
John: Yeah. Okay, great.
Bridget: Keeping your money in your checking account, and probably most bank savings accounts. They earn something like, 0.01%. And they play on the fact that even if you were good in math, you didn't like it. So they're playing at 0.01% and an Internet savings account, we use, Ally a lot, are paying 4.2%. Okay, so that's thousands of times better. Thousands of times. Not four times better.
John: Right.
Bridget: Even if it were four times better, it would be worth it. Okay, so you wanna make sure you engage and get it into a decent savings account and get it out of your checking account. And again, this is money for your emergency fund. This isn't your operating account. I gotta pay my mortgage out of this, I gotta pay my bills out of this. That's not what we're talking about. We're talking about money that you're not going to need immediately.
So for your emergency fund and then maybe just other money you don't know what you're doing with. I had a situation with one person I know that one of their parents just died and they're just trying to sort it out and really overwhelmed, but it's like, okay, you have a pot of money, you'll figure out what you're going to do with it. Put it in one of these savings accounts. You'll earn money on it while you figure it out. And that's fine.
John: I'll tell you, it's such a refreshing thing for somebody to be talking about where to get interest. For 20 years, there was no place. Everything was getting less than 1%. Golly, it doesn't make much difference where you put this stuff. And I just had a friend of mine who his mom had to move into retirement community, so they sold mom's house, and they got like half a million bucks. And then there were some things they had to do helping mom, and then some of that was going to go to him and his brother and all these sorts of things.
What do you do with this sort of stuff? And the one big thing is don't leave it in the checking account. And we've been having a lot of conversations with clients across the board on this, but it's sort of simple. I got savings account over at the credit union, these sorts of things. And you start taking a look at those interest rates, and if you don't pay attention, you miss out. One of my big takeaways from our discussion already here in this short period of time is pay attention. We haven't had to pay attention for the better part of two decades, because nothing was paying much interest.
Now, especially when you're talking about, hey, we got half a million dollars from selling a house or from whatever, a life insurance settlement, just parking at some place to earn some interest over time makes a ton of difference on things. And we don't make quite as active as use of the high interest online accounts, but 4.2% is a great thing. We typically will have folks buy treasury bills, CDs, or things like that.
Bridget: Yeah. We're going to talk about what not to do first, and that's get your money out of the checking account. That's number one.
John: Right.
Bridget: So the big mistake is leaving it there. And so, we want to make sure you avoid the big mistake. Now, with where you put it, there're subtleties, but none of these is going to be a big mistake.
John: Yeah.
Bridget: That's what I'm going to say. There're going to be two factors to think about. One is safety and insurance amounts. And then the second you're going to want to think about is how long can I tie this up for some period of time, or do I not want to tie this up for some period of time? So let's start with the safe part. We want to make sure if it's in a bank or credit union, it's FDIC insured. And so, let's just briefly review FDIC rules. For a joint account, how much insurance does that have on it?
John: Is it still $250,000 apiece and $500,000 total between the two?
Bridget: Yeah, so you got $500,000.
John: I've always got to look up those rules.
Bridget: Yeah, exactly. And even during the last banking crisis, they suspended some rules. And that wasn't actually that big of a crisis in retrospect. So it's worth looking up. But if you're account is over $250,000, it makes sense to just open another account.
John: Yep.
Bridget: And you can open it at the same bank, but you want to think about $250,000. You might have two that are $250,000 each. That's totally fine. And if it's a savings account, like Ally or your credit union, you can take the money out. It's available. So again, if you’re saying, “I don't know what I'm doing with it. I just want to earn some money and not be dumb about it in the few months before I figure it out,” then that's fine. You want to make sure that you're meeting the $250,000 rule. You're going to earn a little bit less interest because it's available. But again, 4% versus less than 1%. If you tie it up right now for a year, you can get over 5%.
John: Yeah.
Bridget: So let's talk about tying it up. Now, the cool thing about when you tie it up is that you can have larger amounts, so you're not as worried about the $250,000. So that is CDs. Oh, CDs are still $250,000, because that's a bank instrument. But with treasuries, you can go over $250,000.
John: Right. That's backed by the government.
Bridget: Backed by the government. So again, you want T-bills, or in this situation, treasury bills. So back up by the government and you can go up as high as you want on those. But they have a date on them, and they'll pay 5% for a year, or 5% and some change. If you want longer bills, that's okay. If you want to tie it up for longer, you can. Same with CDs. If you want to tie them up for longer, that's fine.
John: Right.
Bridget: And in both of those cases, you can get your money out, but you won't get the same interest rate. It's not ideal, but it's not the end of the world.
John: Right. It’s kind of weird now, because the longer you tie your money up, the less return you get.
Bridget: Yeah. That’s because people think interest rates will go down, but it's still pretty good. It's still over 4% if you tie your money up for as long as you want. And where do we get those?
John: Treasury bills?
Bridget: For T-bill, we use Schwab.
John: Yep. Typically, your brokerage firm will have those available.
Bridget: And we buy CDs at Schwab, too, but you can go to your local bank as well. It's kind of up to you.
John: Yep. And there's the convenience factor, too, as we talk about some of these things. I was talking with my friend who sold the house for his mom, and it's like, listen, could we get a little bit higher if we went to an online bank or a broker thing? How long are you going to have this money there? And it's getting an extra half a percent. Not that it's nothing. But you go, “Listen, if I can walk down to the local bank, that would be easier.” And in this case, it was. That was a priority for him. There's some value in those things, rather than going online and doing this. But, of course, know what the dollar amounts are.
Bridget: Although the person I was talking to had a checking account at Bank of America, maybe I shouldn't say that. But I told them, “They're not paying you that much. Get the money you want to park out of there.”
John: Right.
Bridget: Even though it's convenient, $100,000 is going to get you $4,200 in a year.
John: Right.
Bridget: That's worth it for most people. That's worth the inconvenience of doing a little bit of online clicking.
John: And I love that idea of talking about what is the actual dollar amounts. If you have $10,000 and you're getting an extra 1%, it’s not nothing, but we're talking $100. If you have $100,000, now there's some significant benefit. If you have a half a million dollars, suddenly you go, “Hey, wait a minute, a quarter or half a percent makes a difference at that level.” Whereas again, for $5,000, not that you don't want to be smart with your $5,000, but the actual dollars that you make getting an extra 1% are much smaller. So the percentages are one thing, but then what does it mean in dollars?
Bridget: Right. Absolutely. And again, we're talking about your safety concerns and your convenience concerns but figure out the dollars when you're thinking about convenience.
John: That's right.
Bridget: Because for $4,000, I'll go out of my way.
John: Exactly.
Bridget: I'll spend a dollar or two. That's $4,000.
John: Yeah, that's exactly right. The other thing that we're using on the short term as opposed to the banks are really short-term treasuries, which are paying in that 5% range. So you will buy a one-month treasury bill that renews. You can sell at any point in time. And if we're getting around that 5%, that's sort of our alternative. But you got to go through the brokerage account, you got to use Schwab, so here's some different factors that play into it.
Bridget: Yeah. And you can use Treasury Direct, but neither of us do, so we don't really know too much about it. I think there's some people who have their accounts at Vanguard, then they use Treasury Direct like crazy. And that's totally valid, too.
John: Right. But again, for us anyway, it's going through Schwab, and I'm sure it's the same thing with Fidelity and Vanguard.
Bridget: Yeah.
John: You can go online with the connections there. And then the online banks. I know a lot of people use those things, but paying attention is key. What are you actually getting? It's surprising how often you might go, “Oh, I've got it at the credit union. It's in a good spot.” And then you go, “Wait a minute, they're only paying 2%. I could be getting 4%, and I got $100,000 in there. Oh, that's material information.”
Bridget: Exactly. And I think with Treasury Direct, one of my concerns about it is whether there is a market for it if you want to sell. So if you do have a T-bill at Schwab, and you want to sell it, you can sell it. And you might not make as much money as you would if you don't sell it, if you just let it mature, but there's already market for this stuff. People want to buy it. So it's easy if you're at one of the brokerage houses.
John: Yeah.
Bridget: It seems like that's a great place to wrap up. I'm Bridget Sullivan Mermel. I've got a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I've got a fee only financial planning practice in Middleton, Wisconsin. Both Bridget and I are taking on new clients, but if you like what you hear on our show and are interested in finding an advisor in your area, we're both members of the Alliance of Comprehensive Planners, so you can check out acplanners.org to find an advisor in your area.
Bridget: And if you haven't yet, please subscribe.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.