Inflation and high interest rates aren’t going away. Don’t let your checking account rob you of a decent return on liquid assets.
By William Baldwin, Senior Contributor
Forget bank CD rates for a moment. If you want more interest, look at something under your nose: the bank account you use to collect a paycheck and pay bills.
Chances are you are earning something in the neighborhood of zilch on your liquid assets. You can fix this. You can get 4%.
Below are four remedies to pick from, one of them, interestingly, coming from a bank that participates in the usual checking robbery. Alongside those recommendations you will see tips on protecting your money from thieves.
The problem: You need a pile of cash to cover checks and other debits, a pile big enough to eliminate the risk of a bounced payment. If your bounce-proof sum averages $15,000, $600 a year in potential interest is leaking out of your pocket. With a bit of effort you can capture this interest.
Each of the four solutions has two parts. You set up a transaction account that has a fairly low balance and attach to it an investment account that has a large sum. The large pot goes into either a money market mutual fund or an exchange-traded fund that acts like a money market.
The transaction account does most of the things you expect from a bank. It takes in electronic payments of paychecks, Social Security benefits and the like; it makes electronic disbursements for utility bills, full payment of credit card balances and the like; it can be used to send money electronically to a tax collector or another financial account.
The investment account holds most of your short-term assets. It could also hold all of your other stocks and bonds.
We’re talking about taxable accounts here. Retirement accounts are a different ball of wax. Also, the discussion is aimed at people who pay off credit card balances in full. If you carry a card balance, seek advice elsewhere.
Solution #1: Fidelity Investments
Open two accounts, a brokerage account and what Fidelity calls a Cash Management Account. The CMA does all the everyday debits and credits and pays close to 4% interest on the Government Money Market available there. Take a pass on Fidelity’s FDIC-insured account, which has a crummy yield. (See “FDIC—Who Needs It?”)
The brokerage account has lots of investment options, including a Treasury-only money market fund. Aim to maintain a fairly small balance in the CMA and a large sum in the brokerage account.
Your two Fidelity accounts can be hot-linked with a “self-funded overdraft protection,” whereby the CMA automatically draws on the brokerage account’s money fund to keep its balance from dropping below $0 (or, if you prefer, a target balance amount). Order checks for the brokerage money market so that you have the option of paying big bills, such as for estimated taxes, via the mail, earning a few extra days’ interest.
While you’re at it, get a Fidelity Visa card, which rebates 2%.
Advantages: Fidelity’s 216 walk-in branches and its excellent platform for trading stocks, Treasury bonds and exchange-traded funds.
Disadvantage: no cashier’s checks.
What About The Thieves?
Fidelity, Chase and Schwab will be happy to attach a debit card to your transaction account. Chase has its own automatic teller network; Fidelity and Schwab will reimburse you for ATM fees. My advice is to decline the card. Vanguard doesn’t have a debit card but offers links to Venmo and PayPal. Avoid such links.
Financial technology provides wondrous convenience to you. It’s also convenient for pickpockets and North Korean hackers.
Protect your life savings from the thieves. In addition to the main financial relationship with one of the four institutions described above, open an account somewhere else, call it Acme Bank & Trust, for walking around money. At Acme, get a debit card to use at ATMs. Use Acme to fund your Venmo, PayPal, GooglePay and ApplePay accounts.
Feed Acme via wire transfers from your brokerage. Someone hacking into Acme won’t have access to the brokerage account.
Further safety steps: Opt for two-factor authorization on financial accounts and email accounts; never use your phone to look at your brokerage account; don’t let your browser save the password for a financial account; access the brokerage account only from home or a very secure Wifi.
Solution #2: Vanguard
Open what Vanguard calls a Cash Plus account. Cash Plus handles the everyday electronic transactions and pays 3.65% on an FDIC-insured balance. Keep a small amount in the FDIC account and a large sum invested in the Vanguard Treasury Money Market. Shares of that fund are one of the few securities permitted in Cash Plus, so a brokerage account is not necessary, but it’s a good idea to build in some flexibility, so open a brokerage account as well.
You can transfer between the two accounts but there’s no hot link, so you have to keep an eye on the balances. After a year is up you are eligible for check writing. Order checks for the money fund and use them for big-ticket items like college tuition and estimated taxes.
Vanguard runs leaner than Fidelity. With lower expense ratios on its money funds, its yields are better, but when you call for help you’ll spend more time on hold.
Advantage: Good interest rates, except on the Cash Plus balance.
Disadvantages: no branches, no cashier’s checks, mediocre customer service.
Solution #3: J.P. Morgan Chase
Open a checking account. Then open a self-directed, zero-commission brokerage account. Transfer into the brokerage at least $250,000 of assets, which can be stocks you bought long ago (you don’t have to sell anything). This will qualify you for a $700 new-customer bonus and protect you from nuisance fees on the checking account.
In the brokerage account keep a large sum invested in a Treasury bill exchange-traded fund. Keep as little as possible in the checking account, which pays 0.01% interest.
Use the checking account for the usual direct deposits, automatic debits, paper checks and access to the Zelle bill-paying network. When the checking balance runs low, sell some of the ETF. On the next business day, transfer the proceeds into checking.
You can eliminate the one-day lag by stashing money in a liquid savings account ($50,000 minimum to open), but this pays only 3.6%, is subject to state tax and doesn’t absolve you of the obligation to move money from the brokerage account to the checking account.
The loss of interest on the transaction account makes this an expensive solution. But you get a huge network of branches and ATMs, access to cashier’s checks (needed to buy a car or house) and a banking relationship that may be useful if you want a mortgage or business loan.
You might find similar offers at other nationwide banks.
Advantage: traditional banking with face-to-face service.
Disadvantage: less interest income.
Solution #4: Charles Schwab
Schwab, a forerunner in discount brokerage, has a bank subsidiary that can do what banks usually do. As at Chase, you open both a brokerage account and a checking account. As at Chase, the yield on the checking account is negligible (0.05%). The main difference is that Schwab has an attractive Treasury money-market mutual fund.
Schwab offers bounce protection: In case of an overdraft, the checking account can draw on a margin loan from the brokerage account. But it’s up to you to clear the (expensive) margin loan by selling money fund shares.
A Treasury mutual fund will be better for you than a T-bill ETF if you are going to be making frequent transfers between the brokerage account and the checking account. The ETF has a transaction cost in the form of a bid/ask spread, while the mutual fund has no transaction cost. The mutual fund option does not, however, spare you the one-day wait between cashing out and getting access to the proceeds.
Advantages: banking services, including cashier’s checks, and branches in 45 states.
Disadvantage: less interest income than at Fidelity or Vanguard.
FDIC—Who Needs It?
A popular choice for people using a broker for their banking is an account covered by the Federal Deposit Insurance Corporation. It’s a bad choice, for two reasons. The yield is likely to be low and the interest is subject to state income tax.
Better: Keep a minimal sum in the transaction account, the one that takes direct deposit of your paycheck and handles automated payments of utility and credit card bills. Store most of your liquid assets in a U.S. Treasury fund. When the transaction account runs low, fuel it from the Treasury fund. When it’s flush, send money the other way.
A fund invested in short-term U.S. Treasury paper has no more credit risk than a bank account backed by the FDIC. The only reason the FDIC is safe is that it is in turn backed by that same U.S. Treasury.
For the Treasury fund, you can use a Treasury-only money-market at Vanguard, Fidelity or Schwab (see table for yields). If your broker isn’t one of those, use an exchange-traded fund that owns the same kind of Treasury bills and notes. Two good ETF choices: SPDR Bloomberg 1-3 Month T-Bill (ticker: BIL), and Vanguard 0-3 Month Treasury Bill (VBIL).
The price of the SPDR product climbs a penny a day (rounding here); after a month it disgorges a 30-cent dividend and the price collapses by 30 cents. With the ETF, but not with a money-market fund, you’ll suffer a transaction cost in the form of a bid/ask spread on the fund shares. For the two I cited it comes to $1.10 – $1.30 per $10,000 round trip. Also with the ETF: You don’t get your hands on the cash until the day following a sale of ETF shares. In some cases, such as when you use a check to draw on a money-market fund, the money market fund doesn’t entail a one-day wait.
The objective with any Treasury fund is to keep your state tax collector’s mitts off the interest. If you live in no-income-tax Texas or Florida, this is irrelevant. If you live in a high-tax state, it matters. State tax can shave 20 to 50 basis points (0.2 to 0.5 percentage point) off the return on a money-market fund.
Watch out. There are funds with “Treasury” in the name that invest in repurchase agreements, which are not eligible for exemption from state tax. Three states have an additional hurdle, relating to asset percentages.
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