How to Start an Emergency Fund (and Why You Need One)

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If you have a financial emergency — an unexpectedly high medical bill, a sudden move across the country, or a job loss — how will you pay for it? Most financial advisors recommend keeping a separate emergency fund that you wall off from your retirement and other lifecycle-related savings accounts. This will allow you to meet urgent funding needs without having to take money from your retirement or educational accounts, which can lead to penalties and tax bills.

It can be difficult to get started with an emergency fund, especially if you’re focused on specific savings goals like buying a house or paying tuition. The best way to make saving a habit is to use behavioral-finance techniques to your advantage. Open an online-savings account at a bank that pays high interest rates, and set up automatic monthly transfers from the main checking or brokerage account where your paycheck gets deposited. That way, you won’t have to think about making a manual deposit. It’s okay if you start with a small amount; the important thing is to be consistent.

While you’re setting up your emergency fund, make sure that you’re earning the highest interest rate possible. This will harness the power of compound interest, which means that the money in your account will earn interest as it sits there, and, if you don’t take it out, will accumulate as the interest goes back into the account to earn even more interest.

Why does this matter? Your emergency fund, by design, is money that you are going to keep on the sidelines and — hopefully — never have to use. Because you are not going to invest it in securities, which are risky, you want to make sure that you can earn as much as possible in interest on your cash in this account. Earning higher interest can help your emergency fund keep pace with inflation.

It’s also important that your emergency fund be kept in an account that’s fully liquid. If you have to access this money, you may need it immediately; you won’t have time to wait the three days that a money market fund will take to get the money back to you. An online savings account solves this problem. You can have the money wired back to your checking account same-day.

Are these accounts safe? Any bank account that is FDIC-insured is backed by the federal government up to $250,000 per depositor, per account type, per institution. If the bank goes under — unlikely, but still possible — the FDIC will return your money up to this limit.

One good way to make sure your emergency fund is FDIC-insured and kept in the highest-rate online-savings accounts possible is to use technology solutions, like MaxMyInterest, to manage it. Max isn’t a bank; it’s software that automatically allocates your funds among high-yielding accounts at online banks, to make sure your money always earns as much as it can safely. You can learn more at MaxMyInterest.com.

Keep Your Bank, Max Your Cash

With Max, earn more on your cash while keeping your existing checking account, or using a brokerage account.

You’d like your cash to earn more — but you don’t want to switch banks.

Enter Max, an intelligent cash management service for intelligent investors. It offers a way to see all your cash at once, while earning you higher yield and obtaining broader FDIC insurance coverage. Max even simplifies tax season, delivering all 1099-INT statements by email in a single password-protected PDF.

Max works with your existing checking account — unless you’d rather open a new checking account or use your brokerage account. Here’s how:

 

Transactional Checking Account

Most investors have a checking account at a bank that they use to pay bills, accept direct deposit of their paychecks or partnership distributions, and manage their household finances. Many Max members link this checking account to Max, because they value Max’s automated optimization that restores their checking account to their pre-set target balance each month..  For example, if you tell Max that you wish to keep $30,000 in checking, but Max finds only $22,000 at the time of your monthly optimization, it will pull $8,000 from savings to bring you back to your target balance of $30,000.  Similarly, if Max finds excess cash sitting in your checking account, it will automatically be swept to your online savings accounts, where it can earn more. We typically advise that clients set their target checking account balance to be slightly higher than their monthly working capital needs, to ensure an ample cash cushion.

 

Separate Checking Account

Some Max members elect to open a new checking account reserved specifically for Max. They move into this account any funds they wish to optimize, link their online savings accounts, and start optimizing. Often they set a low target balance on this checking account, since they don’t plan to use it for any purpose aside from Max.

This setup functions much like a separately managed account, allowing members to cordon off a specific amount of cash to be optimized, separate from the other cash in their portfolios, and not impacted by their daily transactional activity. They can view and manage this cash from the Max dashboard, and when they need to access this cash, they can move it back to the checking account using Max’s Intelligent Funds TransferSM feature, or wire it elsewhere directly from their online bank accounts. It’s easy to open a new checking account online, without visiting a bank branch.

 

Brokerage Account

Many people keep a significant portion of their cash in their brokerage account. Max supports bank and cash management accounts at brokerage houses including Charles Schwab Bank and Fidelity. This strategy takes full advantage of Max to garner additional FDIC coverage and higher interest rates on the cash that’s not currently invested. Most brokerage accounts pay less than 0.1% on your deposits, while the Max average is 1.00%. Historically, investors who chose to maintain cash as dry powder, on hand to deploy when market opportunities presented themselves, typically lost out on the ability to earn interest on these funds. With Max, that’s no longer a problem. You can earn dramatically more while keeping your cash liquid and easily accessible, within reach when it’s time to trade.  Since the average HNW investor is holding 23.7% of his or her portfolio in cash, picking up an extra 0.90% of interest income on cash is equivalent to earning an extra 0.21% across your entire portfolio.

Learn more about setting up your Max account or read our one-page setup guide. Have questions? Ask Max Member Services at member.services@maxmyinterest.com.

Fiduciary Solutions for Financial Advisors: How to Think About Clients’ Cash

Max members are earning about 10 times more on their cash than the national average.

Max members are earning about 10 times more on their cash than the national average.

With the move towards the fiduciary standard across the investment-management landscape, financial advisors increasingly are looking at how they can make sure their clients are getting this standard of advice for the cash portion of their portfolios as well as for their securities. That’s where Max comes in. 

Cash is the one asset class that’s present in every portfolio. But a near-zero-interest-rate environment over the last few years has meant that investors overwhelmingly are earning almost nothing on cash. The national average on savings accounts is 11 basis points — 0.11%. As a fiduciary, an advisor is bound to give advice that’s in a client’s best interest financially. For cash, this means advisors have to seek out ways that clients can earn more interest while remaining insured under the FDIC deposit guarantees.

– Think carefully before using money market funds

Money market funds are a traditional substitute for cash, because they’re designed always to trade at a stable $1 per share. But with new regulations, these funds may now be able to hold onto investors’ money if markets are in turmoil. That means that clients may not be able to get their money out of a money market fund when they need it most. With this lower level of safety, and essentially no yield, money market funds may not be up to the fiduciary standard as a cash equivalent.  

– Use online banks

Online banks don’t have branches, so their cost structure is considerably less than their brick-and-mortar competitors. This imbalance allows them to offer higher interest rates to depositors — above 1%, in some cases, making online banks the highest-yielding places to park cash that clients wish to keep fully liquid. FDIC-insured online banks have the same federal deposit guarantee as any other U.S. bank protected under the program.

– Seek more FDIC coverage

Many investors don’t realize that exceeding the FDIC limits in their accounts means that excess money may not be safe if something happens to the bank. If your clients hold more cash than the FDIC limit — $250,000 per depositor, per account type, per institution — you should consider helping them open accounts at additional banks to gain FDIC coverage for as much of their cash as possible. Keeping cash safe is a prerequisite for fiduciaries.

– How Max can help

It’s possible to get both higher interest on cash and greater FDIC coverage. That’s what Max provides for advisors and their clients through the Max Advisor Dashboard. The average Max client is currently earning more than 1.00% on cash and enjoying FDIC coverage across several institutions. Learn more about how you and your clients can benefit at MaxForAdvisors.com.

When Cash Beats Treasury Bonds

The U.S. Treasury in Washington, D.C. (Source: Treasury.gov)

The U.S. Treasury in Washington, D.C. (Source: Treasury.gov)

Certain truths are thought to be self-evident, like the idea that bonds always pay more than cash in the bank. In today’s interest-rate environment, that’s not true. The highest interest Max members can earn is now 1.05%, while the 5-year U.S. Treasury bond currently yields 1.03% and the 3-year bond yields 0.77%. It’s part of the worldwide flight to high-quality assets after the U.K.’s vote to leave the European Union. Many investors are worried that “Brexit” may severely hurt the world’s economy.

What does this mean for investors? Both yields are backed by the U.S. government; the Treasury bond is a government obligation, while Max members are holding their cash within FDIC-insured savings accounts at online banks that are also guaranteed by the government. So the risk profile is the same.

FDIC-insured bank deposits are fully liquid, meaning you can withdraw your money at any time. Bonds, on the other hand, aren’t risk-free; changes in interest rates can cause their prices to rise or fall, introducing what’s known as duration risk. If you buy a bond now and then yields rise, you’re locked in at the old, lower yield, meaning the market will be willing to pay less for your bond and the price will fall.  So unless you hold it to maturity — the entire five years — you’ll lose money.

While buying a Treasury bond means you’re exposed to changes in interest rates, Max members benefit from optimized rates. If the rates on their online savings accounts change, Max will automatically rebalance their funds into higher-earning accounts.

So why would anyone buy Treasury bonds?  Normally, if you’re willing to lock up your money for longer periods of time, you get paid more for taking that duration risk. But not today. At these yields, you can earn more with overnight bank deposits than you can even on a five-year Treasury.  This inefficiency impacts hundreds of billions of dollars of cash held by individual investors.

We built Max to make it easier for individual investors to more effectively manage the cash that they hold, whether it’s in their bank accounts or brokerage accounts.  Max simultaneously delivers higher yield and broader FDIC insurance coverage, with full liquidity, and without switching banks.  

The national average yield on cash held in savings accounts is 0.11%, and many bank and brokerage accounts pay even less. If you’d like to earn more on your cash, or are seeking broader FDIC insurance coverage, or want to keep your funds fully liquid and don’t want to take the risk of investing in Treasurys when it seems like yields have nowhere to go but up (and thus the value of those bonds have nowhere to go but down), keeping cash in high-yielding online savings accounts might be the answer for you.

You can learn more about Max by visiting www.MaxMyInterest.com.

When Your Bank Deposits Aren’t FDIC Insured: Why Deposit Insurance Matters

Understanding FDIC limits can keep your cash safe in the bank.

Understanding FDIC limits can keep your cash safe in the bank.

 

When the stock market experiences choppiness and the global economy teeters, investors wonder about the safety of their money in the bank. In the U.S., we’re fortunate that our cash, with certain limitations, is protected by the Federal Deposit Insurance Corporation (FDIC). This means that as long as you keep your deposits within the limits, your cash in the bank is safe, no matter what happens to the bank.

Here are 5 things to know about the FDIC and your money.

 

FDIC insurance limits

During the global financial crisis that began in 2007, the FDIC limit was raised from $100,000 per depositor, per account type, per institution, to $250,000. This means that a couple can keep $1 million in a single bank: $250,000 in the first spouse’s name, $250,000 in the second spouse’s name, and $500,000 — or $250,000 each — in a joint account held in both their names. If you hold more than this amount in cash, you may want to open accounts at multiple banks.

 

Banks involved

Most U.S. banks are part of FDIC. Those that are will display the FDIC logo on their website and in their branches. If you don’t see it, ask, or check the FDIC website.

 

What’s covered

Here’s the list of accounts that the FDIC insures at banks: “checking, NOW (Negotiable Order of Withdrawal) accounts, savings accounts, money market deposit accounts, and certificates of deposit (CDs).” Note that money-market funds are not a bank product and don’t fall under FDIC protection. What’s also not covered are any investments you hold: “stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if you purchased these products from an insured bank or savings association.”

You can check to what extent your own accounts are covered with the FDIC’s Electronic Deposit Insurance Estimator.  

 

Ways to get more coverage

Some banks hold multiple bank charters and may spread your deposit accounts across these charters. That will increase the amount of FDIC insurance you are entitled to claim. Ask your bank about this.

 

Managing your accounts

If you hold a significant amount of cash, spreading it out among different institutions in FDIC-insured parcels is a smart way to increase your amount of deposit insurance. Be sure to monitor the accounts so that your cash doesn’t exceed the limit at each bank. Max handles this automatically for members. Learn how Max can help you optimize your FDIC-insured cash.