How 10 minutes made me $500

I’m irrationally afraid of overdrawing on my checking account. It’s never happened before (cross your fingers), but I’ve read plenty enough about overdraft fees to make me blanch at the slightest possibility of going below $0. For that reason, I generally keep a $2,500 buffer in the account that I try to never dip below. My cashflow management is pretty solid. So I actually don’t think I’ve ever gone below $2,700. That money just sits there, in the off chance that I go on some sort of unpredicted spending spree or hit an emergency that’s so immediate that I can’t transfer money from my emergency savings account to my checking account in time. no-brainer

Just recently, I started thinking about how much keeping that $2,500 sitting there is costing me. As with most checking accounts, my good old Bank of America account gives zero interest. What would I earn if I simply shifted all but $500 of that money (remember, I’ve never even gone below $2,700) into a money market account?

According to Bankrate, the highest yielding money market account right now pays about 3%. So I’d make an extra $60 per year if I only kept a $500 buffer.

Sixty dollars is nothing to sniff at, and nothing to get excited about either. But that 3% figure, for an FDIC-insured money market account raised my eyebrows for another reason. A 3% yield is more than double what my uninsured money market fund from Vanguard is on pace to earn this year.

I keep a much larger chunk of money with Vanguard as an emergency fund. As a writer in a struggling industry, I felt it prudent to keep a year’s worth of living expenses (that’s a lot – I live in New York City) on hand in case I lose my job. Suffice it to say that a couple percentage point difference between the yield on my money market fund and that of a money market account is costing me several hundred dollars a year. That’s for me — a single, young person with no kids and a relatively low cost of living compared to my New York peers. I imagine the cost would be thousands for someone with a family. Yes, the yield on the money market account could go down and the yield on the money market fund could go up, but nothing’s stopping me from simply moving my money around again.

It’s never a good idea to “chase yield” with money you can’t afford to lose. Emergency fund cash certainly falls into that category. But when you’re choosing between already ultrasafe investments, like between a money market fund or an (even safer) insured money market account, there’s no reason to not pick the higher yielding account.

I’d extend the same advice to any of those thousands of investors sinking their investments into Treasury bonds. If you’re going to go the safe route anyway (and that’s a bad idea, by the way), why not just deposit it into an insured money market account, in case you change your mind? You’d have to lock up your money for 10 years to get a yield that’s as high as top performing money market accounts, and your money would be protected by the very same government that backs Treasury bonds.

You should also doublecheck to make sure you have no cash from dividends or matured bonds sitting uninvested in your brokerage account. Thankfully, I didn’t suffer from that problem. Some of those so-called “sweep” accounts have interest rates as low as 0.01%.

It pays to spend a few minutes each month finding the best paying places to park your cash. In my case, it’ll be about $500 a year depending on how interest rates move. That’s a no-brainer if I’ve ever seen one.

– Joe Light


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