Get Ready to Manage Your Bank (and Other Cash) Accounts

by Philip Brewer on 22 March 2013 3 comments
Photo: daBinsi

For most of the last five years, there's been no reason to pay much attention to how you stored your cash — it doesn't earn enough interest to worry about. That's about to change. (See also: Managing Your Short-Term Money)

Back in the 1980s, it made a big difference where you held your money. Bank interest rates were capped at below the rate of inflation. The money market fund was invented to get around that, meaning that finally, ordinary people (not just the wealthy) could get a market rate of interest on their short-term cash.

Interest rates were high enough that it made a real difference. For much of the first half of the 1980s, it was possible to get 11% on your cash — about double what you could get in a savings account, and infinitely more than you could get on a checking account (because banks weren't allowed to pay interest on checking).

With rates that high, people found it worth their while to do quite a bit of micromanaging of their money. They'd rush to get any new cash earning interest at the earliest opportunity. They'd shift any spare cash into their money market fund even if they knew they'd move it to their checking account in just a few days. They'd delay paying their bills until the last possible moment.

At 11%, a $1,000 deposit is going to earn $2.12 every week. Multiply that (and compound it!) over the course of a year, and pretty soon you're talking real money.

Before, people kept liquidity balances mostly for convenience. If you had some money sitting in your checking account, it meant you could pay bills when they came, rather than having to wait until you got your paycheck.

After, liquidity balances were a profit center.

That's good in a sense. (Profit!) But it was also yet another thing that had to be managed. It could be very unhandy if you were caught suddenly needing your money while it was in the midst of being moved.

With interest rates so low, we've been able to just ignore this.

That's what I've been doing. I mentioned a couple years ago about how the sneaky bank almost got me when they increased minimum balances. Without really giving it much thought, I just boosted the amount I kept in my account. That's been fine so far. The extra interest I could have earned by making sure that money earned a top rate is just a few dollars a year. But once rates start to go up, it's going to be a different story.

Enjoy the luxury of just keeping cash anywhere that's handy — checking account, savings account, money market account, and money market fund — without monitoring rates. Pretty soon you'll have another thing you'll need to manage.

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Guest

I don't understand, are interest rates going up?

Philip Brewer's picture

Probably not this year, but eventually. Maybe late summer next year?

But it is not too early to start thinking about what you'll want to do differently, once you can earn a return on your cash again. Like my example—the total of all the minimum balances I need to keep to avoid fees on my banking have gone up. I need to think about whether that will still make sense, once rates go up. If I do that thinking now, I can have things already rearranged, when it starts to matter again.

Guest's picture
Guest

What people need to understand that "when" rates start to move up they will move very slowy. Rates have crept down here at the bank that I work at by .05 at a time on CDs. That .05 of 1% or.005 if you are to calculate earnings. When Greenspan was moving the Fed funds rate 25 basis points per quarter every quarter that amounted to only 1% a year or .01% a year. I wouldn't get too exicted just yet.