In the next 3 minutes, my goal is to show you two easy ways to earn more interest on your extra cash.
Big banks (think Bank of America) are paying an average interest rate of 0.35%.
Meanwhile, inflation is up 6.4% year-over-year.
In other words, inflation is 18x the national interest rate.
Most of us either don’t appreciate this delta, or just don’t care.
But we absolutely should.
The delta means your purchasing power is literally falling every second you leave cash in your checking account.
$1 last year will buy a lot less this year.
That said, it doesn’t take much effort to earn more interest on your cash.
Let's look at 2 ways:
- Digital Banks
Bonds offered by the US government that earn interest from a semi-annual inflation rate adjustment based on changes in the Consumer Price Index.
To simplify: when inflation goes up, iBonds pay a higher interest rate.
In light of the current inflationary environment, iBonds are paying an incredible 6.89% interest rate (as of this writing).
At one point last year they were yielding more than 9%.
iBonds are about as safe of an investment as you can find, given they are fully backed by the US government.
The primary downside is that you can only purchase $10,000 of iBonds per person, per calendar year.
You can invest on behalf of your spouse and children, so there are ways to increase that $10,000 maximum for a single household.
You are required to hold the bond for at least a year before you can cash it, and there are small penalties for cashing it before year five.
In my opinion, iBonds represent an unmatched risk adjusted return.
I’d strongly recommend maxing out your purchases every calendar year, at least until inflation subsides.
If you’re curious to learn more, visit the TreasuryDirect Site.
And if you’re ready to purchase iBonds, I found this guide particularly helpful.
FDIC-insured banks that operate 100% online, with no brick and mortar locations.
With a smaller footprint, Digital Banks carry a much lower expense load than traditional big banks.
They "pass on" these efficiencies in the form of higher interest rates.
Here are my 3 favorite Digital Banks and their top APY:
I'd use each for different reasons:
- Betterment: to hold cash reserves I am dollar cost averaging into stocks/bonds
- SoFi: to earn interest on my checking account (with direct deposits setup)
- Wise: to earn interest on my business accounts
Note: the cash in these accounts is 100% liquid. Meaning you can pull it out at any time.
Other strategies may offer slightly higher rates, but there is usually a minimum hold period.
Putting it Together
To keep the math simple, let's assume you have $100K of cash reserves.
You and your spouse each buy one iBond. That's $20K at 6.9%.
The rest goes into a Betterment account. That's $80K at 4.0%.
Together, the blended interest rate is 4.6%.
Compound 4.6% for 10 years and you'll generate $53K more income than money left in a traditional big bank account:
If you commit to this process, you can purchase an iBond and open up a digital account in less than an hour of focused work.
What are you waiting for?
That’s a wrap for today.