Savers and investors who are tired of earning low or no interest on their bank checking accounts might want to consider some alternatives that could get a better return or make better use of cash that's not needed for immediate expenses.
Yields are indeed low, as traditional banks pay infinitesimal rates on standard checking accounts and not much more on the so-called high-yield checking accounts. These usually require a higher minimum balance or a certain number of specific transactions per month. Internet banks tend to offer slightly higher rates, though they hovered around 0.5% annual percentage yield, or APY, in early November, according to Bankrate's data.
The alternatives to these low yields aren't all glory without some sacrifice. Rather, most of the options involve pros, cons and trade-offs. Here's a summary.
Pay off debt. By far the best use of idle cash in a checking account is paying off debts, starting with those that charge the highest interest rates, says Ronit Rogoszinski, a wealth adviser at Arch Financial Group in Long Island, N.Y.
"If you have a credit card that you are carrying an 18% interest rate and another card that you might be paying 12%, both are terrible. But my God, get rid of that 18%," Rogoszinski says. "The sooner you get the debt off your books, the better."
Another idea is to refinance your mortgage, using cash from a checking account to pay closing costs, buy down the interest rate or reduce the loan balance, says Justin Krane, president of Krane Financial Solutions in Los Angeles. A smaller balance could mean trading in a jumbo mortgage for a less costly conforming loan or just making the payment more affordable.
"Even if you refi'd half an hour ago, you may be able to refi again," Krane says.
Boost savings. Moving cash from a checking account to a savings account or money market fund could mean a little higher interest, and a savings account offers a psychological advance as well, Rogoszinski says.
"You're saving for something," she says. "So (that money) isn't part of your monthly cash flow, so to speak. By taking it out of checking, you're better off earning something versus nothing, and you can't access it as easily."
Ladder CDs. Another suggestion from Rogoszinski is to divide a lump sum of cash into three or four smaller amounts and buy certificates of deposit, or CDs, with varying maturities.
"You've created a sort of treadmill where every three months, six months or a year, depending on the frequency you've set up, you're able to access the cash," she says. "But, you're also getting the best interest rate without locking up your cash for a long term."
A CD ladder is a time-honored strategy that can improve the total return and offer more liquidity than, say, a single five-year CD. However, Krane isn't sold.
"I believe in liquidity and not in CDs," he says.
Increase risk. Krane is equally skeptical of aggressive alternatives to keeping cash in a checking account such as buying gold company stocks or floating rate funds that invest in short-term bank loans, mainly because these sorts of options involve more risk. That's not to say investing is a bad idea. Rather, investments aren't comparable to the safety of a checking account insured by the Federal Deposit Insurance Corp.
"You're going from something that's a guarantee to something that's not a guarantee," Krane says. "It's apples and oranges."
Risky investments are particularly unwise for people who aren't prepared for life's inevitable financial emergencies, says Todd Mark, vice president of education at the Consumer Credit Counseling Service of Greater Dallas. Mark says it's a stretch for some people to set aside, say, $25 per month in a savings vehicle. For these folks, liquidity and principal protection should be the first priorities.
"It would terrify me if someone said, 'You have $25 a month; let me start investing it for you,'" Mark says.
Shop around. Given the trade-offs, the best option for many consumers might be to stick with a checking account but shop around for a higher yield and lower fees.
"If you can get 1%, that's better than zero. You get the liquidity, and it's FDIC-insured, so that's great," Krane says.
Mark agrees and says that consumers need to keep a close watch on bank fees.
"It's not about the 1% you're earning or how much you could gain by moving (the cash) somewhere with a better rate," he says. "It's addition by subtraction of (paying less) in fees."