Seeking Higher Yields for Safe Cash

The Federal Reserve is punishing savers. People who set money aside in safe, secure, liquid investments are losing purchasing power. The Fed is keeping short-term interest rates near zero. That means real yields (after inflation and taxes) are less than zero.

Low interest rates aren’t good for some financial firms either. Yields on money market funds are less than the expenses charged by the funds. About 20% of money market funds disappeared over the past three years, and others are closed to new money or investors. In many cases, firms are not charging their full fees and are offering the funds as a service to clients.

Fortunately, you have higher-yielding alternatives to traditional money market funds.

One place to look is checking accounts from banks or credit unions. Some are offering what are called high-yield or rewards checking accounts. These pay high interest rates without fees and often without minimum balance requirements.

The average yield on a high-yield checking account is 2.56%, according to a Bankrate.com survey. This is lower than last year’s 3.3%, but its considerably higher than money market fund and certificate of deposit yields.

The yields come with some requirements. Most require at least one monthly direct deposit or automated payment plus 10 or more debit card transactions monthly. Debit card issuers earn good fees on each transaction, so those fees replace traditional checking account fees and make it worthwhile to pay high interest on the accounts. Fail to make the minimum number of debit card transactions in a month and your interest rate falls to about 0.11% annually, according to Bankrate.com.

Restrictions are being placed on debit card fees, but smaller banks are exempt. The banks subject to the fee limits might increase the debit card use requirement or reduce yields if regulations make them less profitable.

There’s usually a limit to the account balance that qualifies for the higher rate. Sometimes only a few hundred dollars qualify for the higher rate. Usually no more than $10,000 earns the high rate. Balances above the ceiling receive a rate comparable to other accounts or money market funds.

So far, there’s no dollar minimum on the debit card use requirement. When your goal is to earn high income on cash, you can meet the minimum number of debit card uses with relatively small purchases you’d make anyway, such as purchasing gasoline or lunch.

You won’t find these high-yield checking account deals at major national or regional banks. They are offered by credit unions and by banks that are small enough to avoid the new rules on debit cards, such as community banks. The highest yield found by Bankrate was over 6% offered by the Boeing Employees’ Credit Union. But the high yield is only on the balance up to $500.

Bankrate found 27 banks or credit unions offering high yield checking accounts nationwide. But you probably haven’t heard of them. They include Ouachita Independent Bank in Louisiana, BankTexas, Danversbank in Massachusetts, and Atlantic Coast Bank of Florida and Georgia. Another 30 institutions offers high yield checking on a more limited basis.

You want to be sure that in your quest for a higher yield you don’t spend more money because of the debit card use requirement. Some observers believe the banks make a lot of money on the accounts because of overdraft fees from people who overspend trying to meet the debit card requirement.

Also, be sure to check for other fees that could take away the high yield advantage. Many of the accounts require online banking and electronic statements. You’ll pay extra for in-person banking or paper statements. You also could pay heavily for replacement debit cards, check printing, copies of canceled checks and statements, and other services.

Before seeking a high yield checking account, be sure you’re taking advantage of what’s available from a local or national bank. You could avoid all fees by bundling services with a bank, such as a mortgage and other transactions. Usually a bank that holds your mortgage will apply that to any minimum checking balance requirements, effectively eliminating many fees.

Another alternative to investigate is your broker or mutual fund or an online bank. These often offer checking accounts without fees and minimums if your total investment accounts total to a high enough balance. You also might get free check printing, no fees for overdrafts or foreign currency transactions, and waiver of ATM fees at any ATM. These features are in addition to interest on checking balances. Details are in our June 2010 issue, available on the members’ web site.

The high yield checking accounts aren’t for investment funds. They’re for money you keep for routine or emergency spending.

RW August 2011.