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Not long ago, it was common to earn low returns on cash — less than 1%.
But after the Federal Reserve embarked on a series of interest rate increases to tamp down inflation, that has changed. Now, investors may get as much as 5% or more interest on their savings — the most they have been able to earn in about 15 years.
“What I hear from advisors these days is the phrase, ‘This is real money now,'” said Michael Halloran, head of partnerships and business development at MaxMyInterest, a company working with advisors and consumers to identify best interest rates on cash.
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When rates were low, cash was more of an afterthought during reviews with clients, according to Heather Ettinger, chairwoman of Fairport Wealth in Cleveland, Ohio.
“Now, I look at those numbers, and it’s like, ‘Wow, it’s not all bad to be sitting on some cash,'” Ettinger said.
The more cash you have, the more the interest can add up.
Investors with portfolios of $1.5 million or $2 million may be holding as much as $300,000 or $400,000 in cash, noted Halloran. At 5%, that may earn $25,000 to $30,000 per year. Over 10 years, that may add up to $300,000, he said.
Even more modest cash sums may still provide meaningful returns. A $50,000 cash reserve earning 5% interest would have $2,500 in interest income over the course of a year, noted Steve Stelljes, president of client services at The Colony Group, which has offices in several states.
Yet all savers are susceptible to making the same mistake — not putting their money in accounts that provide the best yield.
Just 31% of those with incomes of $100,000 or more were earning at least 3% on their cash.
Yet savers in that income group were most likely to be getting higher rates. Only 19% of savers with incomes between $80,000 and $99,999 were earning 3% or more on their savings, as were 22% of those with incomes between $50,000 and $79,999, and 17% of those under $50,000.
“Here’s this $17 trillion industry, and almost all of this cash is sitting in the wrong place,” said Gary Zimmerman, CEO of MaxMyInterest.
Experts say it’s an issue savers need to address.
“Every investor should have their reserve savings working for them,” said Max Lane, CEO of Flourish, a fintech company providing a cash management product to advisors.
“There’s no reason somebody shouldn’t be getting at least 4% right now,” Lane said.
Here are several mistakes with cash that financial advisors say investors should try to avoid.
While many savers may know they can get better interest on their money, it is very easy to do nothing.
“Inertia is one of the strongest powers in nature,” said Tim Harrington, a certified financial planner and founder of Longview Financial Advisors, which is based in San Rafael, California.
For savers who are keeping large balances in accounts providing low interest rates, Harrington said he tries to explain to them that they are losing spending power over time.
While a brick-and-mortar bank may be offering 0.25% interest on savings, inflation is 3.2%, based on the latest consumer price index data.
“You should shop around