The typical checking account pays so little interest that more people are moving their day-to-day banking into their brokerage accounts to get a better return on their cash.
At Fidelity, the nation’s largest 401(k) plan provider, there has been a double-digit percent increase in the number of people using cash-management accounts over the last three years, according to a spokeswoman. These money-market accounts let customers earn competitive interest on their cash without sacrificing many of the key features of traditional banking.
Charles Schwab Corp.
Robinhood Markets Inc.,
Wealthfront and others also offer similar accounts.
Some money-market accounts—a form of mutual fund that invests in short-term debt securities including Treasury bills and commercial paper—currently pay as much as 3.8% annualized interest, rivaling some high-yielding savings accounts. Like checking accounts, they offer direct deposit, debit cards, bill payment and paper checks.
Traditional checking accounts paid an average of 0.05% as of the end of last year, according to Federal Deposit Insurance Corporation data. With inflation running at more than 6% over the last 12 months, that means cash sitting in checking accounts is losing purchasing power by the day.
The move to these higher-yield accounts is one way investors have added about $135 billion to global money-market funds over the four weeks ending Jan. 18, according to financial data provider EPFR, which tracks fund flows from institutional and individual investors.
a financial analyst in Dumfries, Va., said he and his wife rarely paid attention to fluctuations in interest rate on their joint bank accounts at their local credit union, which they used mainly to cover household expenses.
In December, Mr. Carnette realized the interest rate on his Fidelity account was 40 times higher than the one on his checking account and 10 times higher than his savings, so he moved most of his balances to the brokerage.
“That differential just became too large for us to ignore,” he said. Since then, he has withdrawn most cash from the credit union to sit in his brokerage account and collect interest.
Holding high cash balances in investment accounts fell out of favor over the last decade’s period of historically low interest rates and meager returns on money-market funds.
Rising interest rates, driven by the Federal Reserve’s campaign to tamp down inflation, have boosted returns for money markets and turned more consumers into interest-rate shoppers. Wealthier customers are among the many moving their cash to get a higher return.
Still, not everyone is moving their cash to accounts with higher yields. Many Americans have lost out on billions of dollars in potential interest by keeping their money in low-interest bank accounts.
Brokerage accounts used to be less practical as bank-account replacements because of restrictions such as transaction limits. There still are some limitations, advisers say, including the ability to make cash deposits. Fees for money-market accounts have also risen in the past year after being cut while interest rates were near zero.
Brokerage accounts weren’t designed to fully replace traditional checking accounts, and there are advantages to keeping your cash and investing accounts separate, financial advisers said.
“If you notice that you tend to pull from different accounts pretty frequently, you probably don’t want to do this,” said
head of wealth management and financial planning at Zenith Wealth Partners.
She advises clients to keep separate accounts for spending, saving and investing, to limit the chance of overspending or taking on too much risk.
“You don’t want to put yourself in a scenario where you overspend and now you’re selling out of your portfolio to cover expenses because that defeats the purpose of being invested,” she said.
Keeping cash in a brokerage account is an improvement over earning negligible interest in a checking account, said
a fee-only adviser and president of ObjectiveAdvice.com in New York.
“It beats the heck out of 0.3 or 0.4%, but also begs the question of what else you might be missing,” said Mr. Schatsky, adding that there are likely higher yield options elsewhere for those willing to shop around.
Would you forgo a traditional checking account in favor of a money-market account? Why or why not? Join the conversation below.
Keeping cash in brokerage accounts is one easy way to benefit from rising interest rates without actively managing your money, Mr. Carnette said.
“I’m talking to friends and colleagues about it, which is sort of a new phenomenon,” he said. “It’s the new topic du jour.”
Those who move away from banks might also benefit from higher insurance for their money.
Brokerages partner with FDIC-insured banks to hold cash kept in cash-management accounts. Because Fidelity partners with many banks, depositors can have more than $1 million in insured deposits compared with the $250,000 maximum at individual banks.
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