—This should be boom time — the cash version of a bull stock market — for Americans' emergency fund accounts. But despite interest rates on savings hovering around 5%, many Americans' rainy-day funds are drowning in accounts that earn about 10 times less.
While a small sliver of Americans are earning the best yields on cash in more than 20 years, most people are leaving money on the table, according a Bankrate survey. While 7% of savers are earning an annual percentage yield (APY) of 5% or more on their money, and another 15% said they're earning 4% to 4.99%, many savers are earning far less interest.
Nearly two of 10 (17%) say they're earning less than 1%, and another 17% say they aren't earning any interest, according to Bankrate. And 11% said they're "unsure of what interest they're earning" in their savings accounts.
"By having lazy money in your portfolio (or cash not earning a competitive yield), you are missing a chance to make more money," said John Jones, investment advisor representative at Heritage Financial.
Getting Aware Of Interest Rates
Many people are simply unaware of details about their personal finances, and that includes what interest rates they're earning on their money and how that compares to alternatives, says Brian Walsh, head of advice and planning at SoFi. "For these people, the simple act of looking up the APY on their savings account can be eye-opening," said Walsh.
A large number of people that will drive a few extra miles to save on a gallon of gas won't go the extra mile to move their cash savings to an account that pays them the going rate. The Federal Reserve last week kept their key rate unchanged at 5.25% to 5.5%. The Fed also dialed back the number of rate cuts it expects this year from three to one. The upshot is the central bank's higher-for-longer rate policy remains in place.
The average high yield savings account pays 4.91% in interest, or annual percentage yield (APY), according to rates offered by Bankrate.com partners. In contrast, the national average savings account yield was a puny 0.58%, according to Bankrate's June 10 survey of more than 500 banks and credit unions, which include the nation's biggest banks and online banks.
"(Even) if people are aware their current bank is paying a ridiculously low rate, they may not fully appreciate the difference an extra 4% ... would make," said Walsh. To find out just how much a rock-bottom yield is costing you, Walsh recommends that you multiply your savings balance by both your current and potential APY. "That might be a powerful way to motivate them to take action," he said.
Losing Interest
That's a lot of potential lost interest for savers only earning the national average to give up. In early June, savers had $17.6 trillion deposited in U.S. commercial banks, according to the Federal Deposit Insurance Corporation.
Let's say you have $50,000 balance in your emergency fund. You can pad your account by $2,500 each year by earning 5%. In contrast, you'll earn just $290 — or $2,210 less — if you settle for the average 0.58% rate. Even if your rainy-day is more modest, say $2,500, you'll still bring in $125 in interest at 5%, versus just $14.50 if you earn 0.58%. That's real money you're losing out on by not taking the time to move your rainy day fund to a financial institution that will treat your money better.
Max Out Interest Rate Yields
Savers that don't maximize the yield they earn also lose money when inflation is added to the equation, adds Jones. In May, the consumer price index edged down to 3.3% versus a year ago.
"If someone is not earning 3.3%, they are actually falling behind," said Jones. So, someone earning just 0.58% on their cash is losing purchasing power on their money due to the puny yield. In contrast, savers earning 5% on their cash are earning a positive real return, or the gain after inflation is factored in.
Americans, it appears, are willing to settle for less, instead of aiming for a competitive yield that will allow their money to work harder for them. Six of 10 Americans (57%) deposit their rainy-day funds in a traditional savings account offered by a bank, according to a recent Santander Bank survey. Big banks typically offer the lowest APY's, such as Bank of America's 0.01% savings account yield and Citigroup's 0.03%. In contrast, just 18% said they park savings in a high-yield savings account.
"Few Americans are using accounts, such as high-yield savings accounts ... that typically earn more interest over time," the Santander study concluded.
Barriers To Yield
What's keeping them from earning the best rate possible? A preference to stash their cash at a brick-and-mortar bank with local branches (which tend to pay low interest rates). A comfort level with their existing bank also plays a part. And so does an aversion to the idea of depositing their money at an online-only bank.
"Let's face it, changing your primary banking relationship can feel pretty daunting," said Walsh.
But inertia can be costly.
"Savers are enjoying the best returns on savings accounts and CDs in more than 15 years, with the most competitive offers outpacing inflation," said Greg McBride, chief financial analyst at Bankrate. "In addition, these conditions are poised to persist for the foreseeable future. Inflation will need to decline further before the Fed will feel comfortable beginning to trim interest rates."
Moves To Make Now With Your Rainy-Day Cash
So, what's a saver to do to earn a bigger, more competitive interest rate on cash?
First, get proactive to earn a higher yield. If your current bank's APY is far below what you can earn elsewhere, move your emergency funds (not money in a checking account you need to pay your regular bills) to another bank that offers more competitive yields.
"Most Americans are not moving money to earn more," the Santander Bank survey concluded. In the past 12 months, for example, only 18% of Americans moved money into an account that offered a higher rate, according to the survey.
That's why Jones says savers must be proactive and search for a better deal on their cash.
"Shop around and find the most competitive rates," said Jones.
Going Online
Online banks typically offer the highest yields. Examples include Jenius Bank, an online-only bank, which offers a 5.25% APY on savings accounts, according to Bankrate. Other online banks with 5%-plus APYs include EverBank, formerly TIAA Bank, (5.05% yield) and BMO Alto, a division of BMO Bank (5.10%) yield.
"For people that have used a brick-and-mortar bank their entire life, the idea of relying on an online bank can be intimidating," said Walsh.
Many investors, who tend to be more sophisticated, have been moving cash from big banks to money market funds, which sport average yields as high as 4.54%, according to Bankrate.
Cash Is Surging
Total money market fund assets increased by $28.02 billion to $6.12 trillion for the week ended Wednesday, June 12, according to the Investment Company Institute. The $6.12 trillion in assets topped the previous record notched in April and marked the 8th straight week money market fund assets have increased, according to Peter Crane, president of Crane Data, a firm that tracks the money market industry.
Next, lock in higher yields for longer. With the latest inflation data coming in weaker than expected and Federal Reserve watchers expecting the first rate cut as early as September, now's the time to start thinking about ways to lock in current high yields for longer.
"Investors have many options right now, whether it be in stocks, high-yielding money markets, or fixed income, as there is still an opportunity to buy bonds to lock in these elevated yields," said Clark Bellin, president and chief investment officer, Bellwether Wealth.
Look Before You Leap For Interest Rates
Bellin says he's bearish on cash now. The reason: There is too much opportunity to earn higher yields elsewhere.
In fact, money managers around the world are moving money out of cash into higher-yielding assets, according to BofA's June Global Fund Manager Survey. One-third say they reallocated cash parked in money markets to stocks, 25% favored government bonds, 19% are moving to global stocks, 12% are adding to corporate bonds and 4% are buying gold. One reason for the shift out of cash is that eight of 10 money managers expect two to three Fed rate cuts in the next 12 months, which would push cash yields lower.
Going Against The Grain
The best contrarian trade now, according to Bank of America Securities investment strategist Michael Hartnett, is long-term bonds. While bonds with maturities of 20 or 30 years carry the most interest rate risk, they will rise in value the most if rates fall faster or more than expected due to a weakening economy or market shock. "The hard landing risk is too low," said Hartnett.
Jones likes tax-advantaged municipal bonds. So-called "muni" bonds are exempt from federal income tax and can also be exempt from local and state taxes as well. "Yields on munis are higher than they've been and have started to look more attractive due to tax advantaged yields." Tax-equivalent yields on AAA-rated munis range from 5.3% for a 1-year bond to 4.8% for a 5-year muni, according to Raymond James.
