Power Up Wealth podcast – Episode 82 – Where Should You Put Your Cash?
Sharla Jessop 0:00
We’ve often heard, if you watch your pennies, your dollars will take care of themselves. I’m Sharla Jessop, President of Smedley Financial, and today, my guest Parker Thompson, will share ideas on how to make each of those pennies count.
Welcome to the SFS Power Up Wealth podcast where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Parker, thanks for joining me today.
Parker Thompson 0:48
I appreciate it. Thanks for having me.
Sharla Jessop 0:49
Parker Thompson is on our wealth management team, and he has a Certified Financial Planning designation. He focuses on helping people create and navigate their financial dreams. Parker, we focus so much on helping people invest their money and, you know, save for the future and plan long-term. And oftentimes, people forget about the simplicity of making their savings count, whether it’s emergencies or planned spending.
Parker Thompson 1:14
Yeah I think that people get lost in thinking that the only way they can grow their money is through investments, either in bonds or stocks. A lot of people forget about having your money work for you in savings. I think a lot of people miss this opportunity where they think the only account that I can have for the cash that I am saving for some purpose is at the bank, and it’s typically earning a really low interest rate. A lot of people don’t think of what they can earn or have their money work for them that they’re setting apart for a future purchase, home, whatever it may be, even their emergency fund can really work for that more than they think.
Sharla Jessop 1:44
You know, I agree with that. I see, unfortunately, people who keep large sums of money in a checking account. Why is that a red flag to you?
Parker Thompson 1:53
Initially that’s a red flag to me, just from the safety standpoint, because checking accounts are typically less secure. So this isn’t necessarily a podcast to talk about security or safety, but it is notable to say that if you have more than what you need in a checking account, it’s usually harder to pull that money back if someone were to get a hold of your debit card or something of the like, and use that money. The other reason that I don’t like a lot in checking is because it typically doesn’t make a whole lot or even your basic savings accounts. These rates out there, I haven’t seen one that’s much above 0.5% and if you really expand that out to how much money is usually in your checking account, which shouldn’t be that much anyways, you’re not making a lot of money. So it doesn’t make a whole lot of sense to have a lot of money in your checking account. One, from a safety standpoint, two, from just making dollars or pennies on your dollars, like you said.
Sharla Jessop 2:37
Okay so number one, don’t use your checking account as a savings vehicle.
Parker Thompson 2:40
I would not. No, it doesn’t work both ways.
Sharla Jessop 2:43
So then, if people aren’t going they have extra money because a lot of people have discretionary income that they’re saving for. You know, maybe they’re going to be buying a home, or maybe they just keep it for emergency funds. Maybe it’s planned spending, people who save up for expenses that are coming throughout the year. What do you recommend? What are some other options then?
Parker Thompson 3:02
Yeah, there are other vehicles for savings that you’ve heard of and that many people that are listening to this podcast have heard of, and these are not going to be anything new. But I think what is new is some of the rates as they’ve been presented in the last couple years, as they’ve gone up with inflation, some of these rates are very attractive, so things like using CDs or certificates of deposit, using a high yield savings account, or even just money market accounts. These are things that are already at your banks, or things that you can access at the banks that you currently have your checking and savings accounts in. They just give you higher interest, but they’re essentially the same vehicle of earning interest. They just give you a better rate, but they have the same safety, relatively the same terms of just keeping that money there for use in the future, but while you have it there, it just does better for you.
Sharla Jessop 3:46
So talk about the liquidity of these different types of accounts, because if it’s your savings, you might need to have access to it, or, you know, could be maybe a longer term.
Parker Thompson 3:54
That is the main consideration when you’re saving for something like a big purchase in the future or home, you want to make sure that that money is liquid at the time that you need it, as we know, it, as we know, savings accounts, checking accounts, even money markets are fairly liquid. You can pull anytime. The only stipulation between a money market and a savings account is that you only have three transactions per month, versus six transactions or plus, for a savings or checking account, where they’re unlimited. But most people, if they’re having if they have a big chunk saved for something that’s a big purchase in the future, they usually aren’t transacting three plus times a month. So in that regard, why not take the higher interest rate with the money market? The high-yield savings account is just as liquid as a normal savings account. It has the same rules there. The only thing that has a little bit of a liquidity snag on it is a CD, and this is typically why CDs have a little bit of a higher interest rate, is because you’re giving up the liquidity to get the higher interest rate, the higher growth. And these are anywhere from five, six months upwards to two to three, four, five years. Right now, the most common ones people are doing are six months to 12 months, and that’s usually locked up for that time at the bank that you’re using until you need it. You can always get to it beforehand, but there are penalties involved.
So what would you tell someone who has maybe a combination of needs? Like most of us, we don’t just have one need, we have many things that we’re trying to prepare for and save for. How would someone structure that?
I like to think of things in timeframes. This is overarching theme as far as investments go and savings. Anything that is needed for the next one to 12 months, I think it probably needs to be in some sort of a money market or high-yield savings account. Could even be in a CD. If you know that that CD when that money comes due in a year or 18 months from now that you’re going to need to add that time. If you know definitely when that time frame is going to be, you can put it in a CD and have it less liquid. But if you know that some purchase is going to come up in the next six to 12 to 18 months, you might want to have it in something like a high-yield savings or money market so you can pull on it. Anything that starts to stretch out past three years, three to five years, even seven to ten plus years, that’s when we start talking about investing and getting in the market, because those interest rates or those annualized returns are going to be better than what you’re getting offered for your savings accounts.
Sharla Jessop 6:03
So even for more conservative investments, you can really invest conservatively if your time frame’s longer than, say, three years.
Parker Thompson 6:11
Yeah. I mean, we know that you can invest in any sort of vehicle for long as you want. Our main concern is we don’t want to be too conservative that we’re losing our purchasing power, and that our dollar is losing its purchasing power to something that we’ve heard many times in this podcast, inflation. It’s been a very hot topic, and we’ve talked about a lot. The number one thing with these rates that I’m presenting in this article is, how can we outpace inflation? How can we keep our standard of living up with the cost of living that’s going up and up and up? That’s kind of the balance. You want to be conservative and grow your money into the future. You don’t want to be too conservative that you’re conservative that you’re losing out to inflation.
Sharla Jessop 6:44
And those dollars, people don’t think about this often. But if you have your money in a checking or savings account, and inflation is at 3% and you’re earning a half a percent, your dollar is not worth $1 for very long.
Parker Thompson 6:54
The dollar or two that was in your savings account ready to buy the eggs back, pre 2020, could buy the whole dozen eggs. The dollar or two that’s in your savings account now, if it was still in that savings account five years later, four years later, can only buy you four or five eggs. You now need five to $6 to buy a dozen eggs. So that is real inflation in real time, and why you want that money to be growing and not just sitting in a savings account, earning nothing.
Sharla Jessop 7:18
That makes perfect sense. Talk a little bit about laddered CDs. I think that’s a term that’s thrown around quite a bit.
Parker Thompson 7:23
It’s a strategy that you can use. You can use one or two CDs just up front for a certain time frame. But if you want some liquidity happening at every interval that you may or may not need the money you can buy instead of just one CD that’s 18 months and you can only access it 18 months from now, you can buy, let’s say, six CDs that are at different time frames, one that comes due in three months, one in six, one in nice, twelve, so on, so forth. And then you have a little bit of money that is liquid every time you may or may not need it. So it’s a way to sort of take advantage of some of the higher short term interest rates and keep some of that money that’s going to be needed longer term, 18 months, two years, still in a CD, but it gives you the option to have some liquidity, so you don’t have to pull it out for a penalty.
Sharla Jessop 8:06
Parker, I think that most of our listeners have probably seen online high-yield savings. Talk to us about that.
Parker Thompson 8:12
Yeah, it seems to become a newer term, and a lot of people haven’t heard of it, but it seems to be more and more popular as we’re getting into these rates and where you should put your cash. But in addition to a savings account, there’s a high-yield savings account. These can be at brick and mortar locations, but most often they’re at online sites that you can go to, and online banks. They don’t have the overhead of a brick and mortar location, so they can offer you a higher rate, and they’re just as secure, they are FDIC insured, which is all this stuff that we like to see. These high-yield savings accounts typically will offer CD rates or a little bit less than what a CD is offering but at the same liquidity as a normal savings rate. So whatever, whatever competitive rate you want to get right now, these high yield savings accounts are typically getting you that best one that that best rate right now, and they usually maintain that most of the time because they don’t like I said, they don’t have the expenses that other banks do. I recommend these for most people because they offer the same liquidity, the same type of style, as their normal savings account. it’s just online. So if people can get comfortable with with exchanging back and forth online with this bank, and they’re not necessarily obscure names, a lot of these are our bigger bank names that we know of and trust. That would be my, my word of caution, or my, my recommendation. There are a lot of high yield savings accounts out there that are offering very high rates, almost like a marketing ploy, that are almost too good to be true. They’re good as a bait and switch, and that’s something you have to look out for. They’ll offer you the very highest rate, or the highest rate you’ve ever seen, but they’ll only do it for three months or six months, and then they’ll drop it to a less than competitive rate. We also want to be a little bit more cognizant of some of the regional banks that are lesser known. So some of the names that you see out there that are not as well known to you and to people around you, those banks can sometimes be at risk for insolvency, right? And we’ve seen some banks fall through in the last few years. So my word of caution is to definitely go for the high-yield savings accounts, but make sure it’s a trusted name. Make sure it’s a bigger bank name. The ones that that are doing really well are typically credit unions that that are highly recommended. And if you’re ever worried or ever have a question of which high yield savings accounts are good or which institutions are good, that’s something you can always contact us as well. Our clients reach out all the time about those.
Sharla Jessop 10:19
Parker, that is really valuable information. Thank you so much.
Parker Thompson 10:22
Yeah thank you for having me.
Shane Thomas 10:29
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Osaic Wealth, Inc., member FINRA/SIPC. Investment advisory services offered through Smedley Financial Services, Inc.® Osaic Wealth is separately owned, and other entities and/or marketing names, products, or services referenced here are independent of Osaic Wealth.
