I have just had my book Income for Life published, and I’d like to share some of the 12 sections and 65 chapters with my myriad of income-generating ideas that absolutely anyone can start using on day one.
One of the biggest challenges for anyone is to make their cash actually work for them. Whether you are wealthy or just starting out, managing cash is the starting point. And with the current yield environment, making your cash pay you more is all the more important. And as a former banker, making cash pay has always been on my mind.
Get Your Cash Off of the Couch
Cash doesn’t have to just sit in your bank or brokerage accounts. Even while parked, it can work just like the rest of your investments to pay you.
Yet for millions of Americans, cash goes to waste. Right now, nearly $8 billion sits in U.S. commercial banks. And guess how much that cash earns? Recently compiled deposit rates show that the average interest rate is less than 1%. And those deposits also can come with fees that bring down the effective earnings ever closer to zero — or even bring negative net returns.
For investors parking cash in money market or sweep accounts — that cash earned an average of 0.3%. Again, with plenty of brokerage fees, that paltry interest can end up again at zero or worse, a negative yield.
There are plenty of alternatives to make your cash pay you.
Start with Uncle Sam
One of the easiest means of parking cash can be found in very short-term US Treasury bonds. You can buy Treasurys through most banks and any brokerage company with nominal fees or commissions. Treasurys are one of the safest places for cash as Uncle Sam can’t default, but there indeed is the risk of inflation.
The yield curve recently is pretty flat. That means that yields are pretty similar for the two-year Treasury and bonds with longer-term maturities. But the two-year represents the bulk of the yield offered in the Treasury market at 1.6%. And the risk of rising rates, although low, is there. The price risk to the rise in yield for a two-year is minimal. Moreover, as you hold the two-year, each and every day means that the maturity becomes ever shorted — further dropping the price-to-yield risk for the Treasury.
In addition, you shouldn’t plan on parking cash in a two-year treasury for more than a few weeks or months. Treasurys are highly liquid and can be sold.
Plus there’s a tax benefit as interest is taxed on income from Treasurys – state and local authorities cannot tax this income. This becomes even more important for investors in higher-tax states.
Rate the Rates
Beyond Treasurys, there are plenty of savings accounts and money market accounts that you can open. Then you can easily transfer cash from your regular bank and brokerage company accounts.
But rather than taking the time to ring around or search countless bank, brokerage and other financial websites, there’s a one-stop solution available through Bankrate. At this website, you can easily scan numerous offerings for savings, money market and certificates of deposit rates around the nation complete with contact information and other evaluations. And this service is free.
This allows you to get a quick handle on where rates are for various types of accounts around the nation. And it also quickly allows you to see minimum account sizes and other characteristics for each product or service.
Let Them Do the Work
With the advent of financial technology there are many startups that have come to the financial market offering a wider array of financial products and services for individuals, institutions and businesses.
And the same is found for cash deposit management.
One of the fintech companies has developed a brokerage-style business for cash deposits. The American Deposit Management Company was founded ten years ago by Kelly Brown. Brown came from the traditional banking market and founded First Wisconsin Bank and Trust which is now part of a collection of banks making up Triumph Bancorp (NASDAQ:TBK).
American Deposit Management takes in your cash and — depending on your requests for liquidity and maturities — will comingle the deposits to obtain wholesale and institutional yields. These are often higher than individual yields. For the customers, ADMC has journaled entries much like is done for individual stock holdings in brokerage accounts.
Brokerages execute stock transactions and hold the stocks in their street names for the benefit of their customers. ADMC’s deposit transactions and holdings operate in a similar fashion.
Another fintech approach is offered by MaxMyInterest which was founded in 2013 by Gary Zimmerman, a former Citibank investment banker. MaxMyInterest is owned by Six Trees Capital, which focuses on investing in fintech companies.
MaxMyInterest provides a different approach to finding and allocating deposits than ADMC. Instead of taking on the deposits, it provides the ability for individual investors to link their own accounts to their MaxMyInterest account. It then will track the rates and yields offered across your accounts and will alert you to the best yields. It can even transfer cash to the highest yielding of your accounts for the best returns on your deposited cash.
Both ADMC and MaxMyInterest charge fees based on the amount of cash in each account.
For the Best Yields, Do It Yourself
Of course, individual investors can track down the best yields for cash deposits with a little work.
Two of the better banks include Marcus, which is part of Goldman Sachs (NYSE:GS) and Synchrony Financial’s (NYSE:SYF) Synchrony Bank. Both of these banking companies are online-focused to provide more efficiency and in turn, compete with higher deposit rates than traditional brick-and-mortar banks.
Both are Federal Deposit Insurance Corporation insured and offer significantly higher yields for savings, money market and certificates of deposit. Inside Profitable Investing’s model portfolios, I’ve been recommending Synchrony Bank. I’ve found the yields to be at or very near the highest, any my subscribers recommend Synchrony’s ease of customer service.
You must pay taxes on interest earned from U.S. Treasurys, but it is exempt from state and local taxes. But for many investors in higher tax brackets, state and local tax rates can be increasingly onerous. And of course, if you can cut out federal tax liability, your net return will be even higher.
This is where tax-free money market funds come in. There are several national funds that are exempt from federal income taxes. And there are individual state funds that are exempt from both federal and state taxes. This is particularly advantageous for high-tax states including New York and California.
Vanguard and Fidelity offer many open-ended individual state tax-free money market funds. This means that you can buy in or out each day at the ending net asset values of the funds. These funds invest in very short-term municipal bonds that often have just days or weeks to their final maturities. This means there is very little interest rate risk in these funds.
Alternative Minimum Tax
In addition, if you are at risk of being caught in the alternative minimum tax, these and other fund companies including JPMorgan (NYSE:JPM) also offer AMT tax-free municipal money market funds.
For a general tax-free money market fund, an example to look at is the JPMorgan Tax Free Money Market Fund (MUTF:JTFXX). This fund has an average day-to-maturity count at 14 days — making for a very stable fund. And the tax-free yield is currently running around 1.1% which includes the modest expense ratio of 0.2%. This means on an after-tax basis for investors in higher tax brackets, the fund’s taxable equivalent for the 37% bracket is 1.8%. And it also means one less line item on your taxable income list come tax reporting time
Now, cash is a really important thing to manage for more income, but it is just the very beginning of 65 income streams that anyone can get. And I’ve written them all up in a simple and engaging way that is easy to understand and follow.
For more information on my book, Income for Life click here. It is nearly 400 pages of income-producing investment strategies for all-weather economic conditions as well as additional income producing ideas that anyone can use successfully.
Neil George was once an all-star bond trader, but now he works morning and night to steer readers away from traps — and into safe, top-performing income investments. Neil’s new income program is a cash-generating machine … one that can help you collect $208 every day the market’s open. Neil does not have any holdings in the securities mentioned above.