Why Cash, Why Now?

FinovateFall2014MaxMyInterest is presenting at the FinovateFall conference this week in New York City. In honor of the conference, which showcases innovative financial-technology solutions, we’re taking a look at the problem that Max solves: people are not earning enough on their cash in the bank, and they’re taking more risk than they’d like by not staying under the FDIC limits on their bank accounts.

Cash makes up a reported 40% of Americans’ holdings — far more than most asset-allocation models would recommend. With the stock market at an all-time high, why are investors holding onto so much cash?

There are several logical reasons why people would choose a more conservative asset allocation, yet in doing so they’ve missed out on a stock market rally which has been going strong for more than three years.

Some investors feel the market is overvalued and are waiting until stock prices fall to buy more.  They remember the tremendous buying opportunities that existed at the depths of the financial crisis. Investors who had “dry powder” — cash on the sidelines available to invest — were able to triple their money simply by buying the S&P 500 Index at the bottom and waiting for the recovery to take hold.

Many savvy investors employ a strategy called dollar-cost averaging, which reduces the risk of market timing by taking a fixed amount of cash and deploying it methodically in equal installments over several days, weeks, or months. This strategy requires holding extra cash, because it takes some time to accumulate the position that the investor ultimately wants to hold.

Investors’ appetite for cash also depends on how old they are. For millennials, who came of age during the 2008 global financial crisis and the recession that followed, the equity markets are viewed to be perilous. Many investors in this age bracket are ultra-conservative in asset allocation and don’t want to own any stocks at all. As a result, they keep a larger proportion of their assets in cash than people their age usually do. According to a recent Forbes article, 40% of millennials favor cash over any other asset class.

Investors approaching retirement tend to hold a larger portion of their portfolios in cash and fixed income instruments — but with interest rates expected to rise, holding long-term bonds could be a losing strategy, so many of these investors have pulled cash from bond funds, hoping to preserve its value better by keeping it in cash.

One investor who’s holding lots of cash is Warren Buffett, whose Berkshire Hathaway has $55 billion in its corporate bank account. Buffett knows that opportunities are out there, and cash gives him the freedom to scoop them up when they become available. As we wrote earlier, Buffett has historically saved up cash when the markets rise, and spent it quickly when the markets fall.  He is perhaps the ultimately market timer.

The trouble with keeping a large percentage of your portfolio in cash is that cash provides little, if any, real yield, often underperforming inflation. Many investors also grapple with the limits of FDIC insurance, which only cover the first $250,000 per depositor, per account type, per bank.  For investors who hold cash in money market funds (as is often the case in brokerage accounts), they are not even covered by FDIC insurance, meaning their cash could be at risk.

For Max members, holding cash on the sidelines becomes less of an issue. Max members are currently earning a weighted-average 0.88% yield on their cash, far more than the national savings average of 0.11% or most money market funds that yield a paltry 0.01% today. Even in this low-interest-rate environment, that means Max members are earning 8 times as much as the average bank customer on cash deposits. While each investor should make his/her own determination as to how much cash to hold, at least via Max, they can rest easy knowing that they’re earning as much as possible on that cash, so that there’s more of it at the ready when the next investment opportunity presents itself.

Ally Bank Raises its Online Savings Rate to 0.90%

Online Saving Just Got Better With GE Capital's 0.95% Interest Rate

Is a rise in interest rates taking hold?

This morning, Max members began earning even more on their cash, without lifting a finger.

Ally Bank raised the interest rate it pays on its online savings account from 0.87% to 0.90%. Over the next 30 days, every Max member with an Ally Bank account will benefit as their cash balances are reallocated, directing funds to Ally Bank to earn this higher rate. No need to monitor interest rates. No need to login to their online savings accounts or order funds transfers. Max does all of this automatically, in the background, with no user intervention required.

The recent rate hikes by both GE Capital Bank and Ally Bank seem to suggest that the rise in bank interest rates that we’ve long been expecting may be coming to fruition. Since the financial crisis, banks have continuously cut rates to match the decline in bond yields and manage their balance sheets. Investors have suffered. Yet the online banks – most with different business models than traditional brick-and-mortar banks – can put incremental deposits to good use. As rates start to rise, we expect more entropy in rates, along with a widening of the spread between the interest rates offered by online banks vs. their brick-and-mortar peers. This means that it will become all the more important to focus on whether your cash is optimally invested.

Today, our Max members as a whole are earning a weighted average 0.89% on their cash that’s being optimized, automatically. That’s 0.78% more than the national savings average, and 0.88% more than most money market funds. Many members are earning even more, up to 0.95%, FDIC-insured.  You can learn more about Max at MaxMyInterest.com

Back to School: Every Little Bit Counts

School's back in session, so it's time to take a look at your finances.

School’s back in session, so it’s time to take a look at your finances.

In school you learned how to get the highest score on a test: first answer all the questions you know, then go for partial credit on the harder ones. Your family’s portfolio can work the same way, first focusing on the decisions that will have the biggest impact and then searching for ways to enhance your returns on the margin. Here are three ways to streamline your finances so that your money works harder for you.

 

– Choose ETFs

Picking individual stocks is tough; even the pros often can’t select winners. Statistically, investors who try to bet on individual companies rarely beat the market. But many people keep trying to pick individual stocks because they’ve read the fairy tales about others who have built fortunes on one stock. Unfortunately, unless you invest in a company early on and it becomes a stock-market juggernaut, you are unlikely to amass a huge profit from just one holding.

The more conservative way to invest in equities is to buy low-cost, broad-market ETFs and to hold on to them for many years, dollar cost averaging into your position over time. That way, you diversify your risk among a large number of stocks without trying to time the market, while keeping your costs low.

 

– Avoid high fees

Why do fees matter? This is one of the areas where investors have a chance to make a real difference in their results, regardless of how the market performs. Every dollar you spend today paying fees – on your funds, your bank accounts, or your investment adviser’s services – is a dollar that won’t compound in your portfolio over time. The power of compounding is what makes a portfolio grow in a steady, reliable way for most investors. Fees aren’t inherently bad — what matters is the performance of your investments net of fees.  If you have a stock fund or a financial advisor that consistently outperforms the market, it may be worth the extra fees.  The problem is that with equities, it’s difficult to find someone who can consistently outperform the market by a wide margin year in, year out.  If you’re paying 1.0 – 1.5% in fees each year, that can put a real drag on your returns over time.

 

– Earn more on your cash

There will always be some portion of your portfolio that you choose to keep in cash, typically held in your bank account or in money market funds. If that cash on the sidelines isn’t earning as much interest as it could, you’re leaving money on the table. Just like with high fees, earning little interest on your money in the bank puts a drag on your portfolio — money that could otherwise be compounding over time. MaxMyInterest.com offers an investor-friendly system that helps you consistently earn more on your cash by helping take advantage of the higher yields offered by online banks.  Today, these yields are as high as 0.95%, considerably higher than the national savings account average of 0.11% or most money market funds that yield a paltry 0.01%.  By monitoring for changes in interest rates, and automatically helping your money move to the leading FDIC-insured banks offering the highest rates each month, MaxMyInterest can help you earn higher yields on your cash, boosting the returns on this portion of your potfolio.

Online Bank Rankings: What’s Missing?

Online-Bank Rankings: What's Missing?

Earn the best returns on your cash, even as interest rates change.

When perusing rankings of online banks, be aware that there’s a crucial piece missing.

Investors who want to safeguard their cash while earning more interest know that online banks are a smart choice. The best of these banks offer considerably higher interest rates for savings accounts than brick-and-mortar banks, with the same FDIC deposit-insurance guarantee from the government. That’s why it makes sense to keep excess cash — above what one needs for near-term expenses — in an online savings account, where it will earn more without taking any more risk.

The problem: banks change their interest rates without warning. If you’ve set up an online savings account with a particular bank, and suddenly the interest rate drops, you might be earning less than you could be elsewhere. If a rival bank raises its rates, you will miss out if you don’t have an account there. And if you’ve decided to solve this problem by opening multiple accounts, you’ll still have to monitor rates and move money between them as rates change.

MaxMyInterest solves this problem for investors, by monitoring interest rates daily and helping your cash flow to the banks offering the highest rates. Our service currently encompasses five of the leading online banks: Barclays, American Express Personal Savings, Capital One 360, GE Capital Bank, and Ally Bank. Each of these is FDIC-insured up to $250,000 per depositor, per account type. We’ve chosen these banks based on several criteria, including customer service, reputation and heft. Each has a depositor-friendly signup process and offers accounts with no fees and no minimum balance.

Once MaxMyInterest members set up accounts at these banks and link them to Max, our service automatically helps move their money between their own accounts to optimize the interest rate they earn. We also take FDIC coverage into consideration, so our members know their cash is insured.

This allows our members to earn the extra interest that online savings accounts pay above brick-and-mortar banks, without worrying about whether they will continue to earn the most as rates change. After a one-time setup, our members rest easy, knowing that Max is looking out for the best rates and optimizing their accounts, automatically.

Online bank rankings are a helpful tool, providing a better understanding of the online banking landscape. Max works with the online banks that sit atop these annual rankings, but addresses the last piece of the online banking puzzle by helping depositors earn the best returns on their cash, even as interest rates change. We’ve also included additional features to make online banking as simple as ‘checking’ and ‘savings’.

Online banking is smart. Online banking + Max is smarter.

Online Saving Just Got Better With GE Capital’s 0.95% Interest Rate

Online Saving Just Got Better With GE Capital's 0.95% Interest Rate

The beginning of a rise in interest rates?

Today, Max members just got a raise, for doing absolutely nothing.

GE Capital Bank raised the interest rate it pays on its online savings account from 0.90% to 0.95%. Over the next 30 days, every Max member with a GE Capital account will benefit as their cash balances are reallocated, directing funds to GE Capital to earn this higher rate. For our members with $1,000,000 in cash being optimized, that amounts to $500 of incremental interest income per year for doing absolutely nothing. No need to monitor interest rates. No need to login to their online savings accounts or order funds transfers. Max does all of this automatically, in the background, with no user intervention required.

Does this foreshadow the rise in bank interest rates that we’ve long been expecting? Since the financial crisis, banks have continuously cut rates to match the decline in bond yields and manage their balance sheets. Investors have suffered. Yet the online banks – most with different business models than traditional brick-and-mortar banks – can put incremental deposits to good use. As rates start to rise, we expect more entropy in rates, along with a widening of the spread between the interest rates offered by online banks vs. their brick-and-mortar peers. This means that it will become all the more important to focus on whether your cash is optimally invested.

Today, our Max members are earning a weighted average 0.88% on their cash that’s being optimized, automatically. That’s 0.78% more than the national savings average, and 0.87% more than most money market funds. You can learn more about Max at MaxMyInterest.com

5 Ways to Manage Finances as an Expat

MaxMyInterest makes it easy to manage your finances

MaxMyInterest makes it easy to manage your finances

Accepting a post in a foreign country? Living and working abroad is an exciting experience, but it can wreak havoc on your finances. Taxes become more complicated when expats are earning income and managing their finances overseas, from the J1 visa tax systems in the United States to all others around the globe. To do something as simple as access your accounts, you may need to move your banking relationships online, since your neighborhood bank may not have a branch in the country where you’re moving.

From my years of living abroad, I developed a few simple tricks to make it easier to manage our family’s finances. Here are 5 ways to keep your finances in order as an expatriate:

1. Sign up for electronic financial statements and payments.

Request that your banks, credit cards, and vendors of all sorts send you account statements and bills in electronic form instead of through the regular mail. It can take too long for mail to reach you overseas, and you could miss payment deadlines or fail to notice red flags in your accounts if you don’t see them in time. Keep the statements organized on your computer and backup the files to the cloud, using a service like DropBox. When it’s time to pay your credit card bills or other invoices, pay electronically, not by mailed check. Your bank’s website will typically let you do this online. In cases where a paper check is required, leading banks like Citibank will allow you to fill out a form on their website and they’ll mail a physical check for you, at no charge.

2. Ask if your bank offers foreign-currency-denominated accounts.

If your home bank has branches in your new country, inquire about what’s involved in using your account once you arrive. Ask if you need to get a new account denominated in your new country’s currency, tied to your existing home account. If this isn’t possible, research local banks by asking other expats based there. Make sure you’ll be able to conduct business with your local bank in English if you don’t speak the local language.

3. Choose your credit cards wisely.

If you don’t want to pay steep fees when you use your credit card in a foreign country, make sure your card allows for free currency translation. One such card is the Platinum Card, from American Express; other cards from Capital One, Citibank, Chase and Barclays offer this service as well. Also check that you’ll be able to redeem whatever loyalty points your main credit card offers — frequent-flyer miles, cash-back points, or hotel nights — while living in your new country.

4. Understand your insurance policy and coverages.

Evaluate your insurance coverage. Your employer will likely provide you with health coverage. Just make certain it has the benefits you need when living and traveling overseas. Check that your homeowner’s insurance policy will cover you while living abroad in a house you’ll likely be renting. If not, or if you’ll be selling your home in the U.S., arrange for renter’s insurance or make sure your employer is covering this for you. This is also a good time to check on your life insurance policy, as certain countries may require a rider or be excluded from coverage.

Many frequent travelers and expats choose to carry medevac insurance, which will fly you to a hospital or even all the way back to the U.S. in the event of a serious medical emergency. Some credit cards offer this benefit to cardholders. Be sure to check the fine print on your card’s policy. It may be worthwhile to arrange for your own private medevac insurance.

5. Use MaxMyInterest.com to manage your cash from overseas.

Expats often keep a lot of cash back in the U.S., with little need for it on a day-to-day basis. Our service, MaxMyInterest.com, works well for expats who want to maximize the interest they earn on this cash while keeping within the FDIC deposit-insurance limits. (In fact, I came up with the idea for Max while living in Asia, trying to manage our finances.)

Once you set up Max by linking online bank accounts to your regular brick-and-mortar checking account, the system works automatically to rebalance your cash as interest rates change, sending it to the banks that pay the highest interest rates. You can access Max from anywhere in the world. All you need to set up a Max account is a U.S. mailing address and tax ID number. Max members are currently earning 0.76% more than the national savings average. The extra interest income earned via Max could translate into an extra sightseeing trip to explore your new home country, or to travel back to the U.S. to visit friends and family.

Gary Zimmerman is the founder of MaxMyInterest.com.

4 Ways to Keep Your Cash Safe

Watch your cash grow with Max

Sitting on a lot of cash?  Make sure it’s fully insured.

Banks are the safest place to keep your money — until they’re not. It’s a remote risk, but bank failures do occasionally happen.  It’s important to ensure your cash is adequately protected, before it’s too late.

That’s why deposit insurance exists. In the U.S., the government’s FDIC insurance program guarantees the first $250,000 of a depositor’s cash in each insured bank. But many depositors hold much more than the FDIC limit in cash, leaving a portion of their cash at risk in the unlikely event of a bank failure. Investors keep a portion of their financial assets in cash precisely because they don’t want to take risk, so it makes sense to ensure that as much of your cash as possible is protected by FDIC insurance.

Here are 4 ways to keep your cash safe:

1. Open multiple account types

FDIC insurance tops out at $250,000 per depositor, per account type, and per bank. If you set up an account for yourself, one for your spouse, and one held as a joint account in both of your names, together you now have $1 million in FDIC coverage at that bank: $250,000 for each of your individual accounts, plus another $250,000 for each of you for the joint account.

2. Ask if your bank has multiple bank charters

The largest national banks often have more than one bank charter. This means they can offer their account holders the ability to have accounts at what’s technically more than one bank. Because FDIC coverage applies per bank, this can increase the deposit insurance that account holders can receive. If you hold $750,000 at a bank that has three bank charters, you may be insured under FDIC rules for the entire balance. Ask your bank if this applies to your accounts and read the fine print to ensure you are adequately protected.

3. Open accounts at different banks

To make sure your cash in the bank is insured, you can open accounts at a variety of banks. That way, even if one bank fails, you’ll still have access to your accounts at the other banks.  Be sure to keep your accounts below the $250,000 FDIC coverage limit at each bank.

As you spread your accounts among different banks, consider online banks as well as traditional brick-and-mortar banks. Savings accounts at online banks often pay considerably more in interest, because they don’t have to support the same level of expenses for branches or tellers. Just be sure to monitor the rates your banks are paying, so you can make certain you’re getting the most interest you can. Banks change their rates frequently.

4. Use MaxMyInterest.com to manage accounts held at multiple banks to keep you within the FDIC limits while earning more in interest

If you’d like a solution to help you manage your existing brick-and-mortar checking account along with online savings accounts, while optimizing the amount of interest you earn, try our service, called Max, at MaxMyInterest.com. Max uses the links between your brick-and-mortar checking account and your online savings accounts to optimize the amount you earn in interest on your cash in the bank, while respecting FDIC limits. That means that your money automatically moves between your own accounts to stay within the FDIC limits at each bank, while helping you earn as much interest as possible, even as rates change.

As an alternative to bank accounts, many investors choose to keep cash in money market funds.  This is especially prevalent within brokerage accounts.  However, shares of these funds aren’t insured, which means they could potentially lose value. During the global financial crisis, one such fund, the Reserve Primary Fund, dipped below $1 per share in value, sparking an exodus from this class of investments. Since then, Americans’ investments in money market funds have fallen from $4 trillion to $2.7 trillion today.

One downside of money market funds: many of these funds currently yield as little as 0.01% annually. By contrast, bank accounts typically pay 10 times that much in interest and online savings accounts managed through the MaxMyInterest.com system are yielding approximately 80 times more, even after taking fees into account.  Max members are currently earning a weighted average of 0.87%, or 0.79% net of fees, all via FDIC-insured savings accounts at leading online banks including American Express, Barclays, GE Capital, Ally Bank and Capital One 360.

Gary Zimmerman is the Founder of MaxMyInterest.com.