NerdWallet's Smart Money Podcast - Which accounts can make me the most money?

Episode Date: November 4, 2019

You can make money just by putting your cash into the right account. Which account to choose depends on a few factors, though. In this episode, Sean talks with investing Nerd Arielle O’Shea about the best ways to make money off of cash you have sitting in a bank account.

Hello, and welcome to NerdWallet's Smart Money Podcast, where we answer your money questions in 15 minutes or less. I'm your host, Sean Piles. This week, I'm joined by Arielle O'Shea, one of my favorite investing nerds. Hi, Sean. I'm so happy to be here. I'm so happy to have you. Can you please do the honors of reading this episode's question? Yes. So this week's question comes from Miriam in New Hampshire, and she says, I have about $3,000 sitting in a savings account that's not doing a whole lot for me. What's the best way to make money off what's just sitting in my bank account? I love questions like this because it's basically how can my money make me more money,

which feels like a kind of fun and magical puzzle in a way. And it also appeals to the laziness in all of us. The question is basically, how can you get more cash from the money you already have without having to do a whole lot? And fortunately for you, Miriam, and our listeners, Arielle is just the person to help you answer this question. Investing, aka making money off of your money, is something Arielle has been writing about for 13 years. That's right.

And I love this question too, because it's really my favorite thing about investing. We all work hard to earn our money, and that money should really be working hard for us too. When you invest, your money pretty much doubles and triples over time without you really doing anything. And it's not nearly as hard to make that happen as most people think. Right. And so on this episode of NerdWallet Smart Money Podcast, we're going to give you the insider tricks to make more money off of what's sitting in your savings account. And at the end, we'll give you the takeaway tips to help you get a jumpstart on it. I'm excited. Me too. All right, let's get to it. Okay, Arielle. So what sorts of

options does Mariam have to earn more money off of what's sitting in her savings account? Mariam has lots of options. First, what's sitting in her savings account? Miriam has lots of options. First, there's probably a better savings account out there that pays more, like an online account or a cash management account. But depending on what she needs this money for and when she needs it, she might also be able to explore investing in the stock market. Okay, well how should she decide which option might be best for her? I think we need to back up a little bit and talk about a Merriam-Wantz out of this money. Because when I hear that you have $3,000 in a savings account, I have a lot of questions. I want to know, is this your emergency fund? Is this money you've set aside to invest, but you haven't quite yet taken that step because you don't know how to

invest? What exactly do you want this money to do for you? That's a really good point there, because we don't know if it's an emergency fund exactly. And if it is, it's actually okay that that money isn't making a ton more money because it's working for you in a different way. That money will help you fix your roof when climate change inevitably brings a typhoon to your neighborhood, or it's paying the bill when your dog gets sick. And most importantly, it's keeping you out of debt when those or other life events happen, which they inevitably will, because you can draw on that cash instead of using a credit card that probably has a pretty high interest rate. But say it's just sitting in a regular checking account, that money probably isn't doing a

whole ton for Miriam. So how do you think she can earn a better rate if this is an emergency fund that she needs to keep in a savings account? So this is the question. A lot of people just swallow whatever rate they're given by their bank, and they assume they can't get more. And that is so wrong. Even if it's an emergency fund, you should still try to put it in an account with the highest interest rate you can find. And if your cash is in a brick and mortar bank, like a local branch or one of those big national chains, you're probably earning pennies on your money. And

there are ways to earn more while still keeping it safe and accessible, which is really important for an emergency fund. So one is simply moving to an online savings account. These pay 10 or 15 times as much as a traditional bank. And they're really similar. So in most cases, you're going to get a debit card so you can access the money quickly. You'll be able to make really fast, easy transfers online.

It really works like any other bank, but you earn a better interest rate. So it's a win-win. Right. They're kind of surprising, the fact that an online bank would actually be better than a brick and mortar. But if you think about it, they don't have to pay for the overhead of running an establishment like that. So they have more flexibility to give you a greater return on what you're putting into their accounts. My emergency fund is sitting in one of these and I'm earning about 2% per year. And that's a ton better than my primary bank offers. So if you're curious about these online savings accounts, we have a link to a roundup on our show notes post at nerdwallet.com slash podcast. And with that plug out of the way, I'm wondering Arielle, what other options you think would be

good for Miriam if this amount is an emergency fund? Yeah, so I have an online savings account and I'm really happy with it too. But there is another option out there and it's called a cash management account. And these are kind of all the rage right now in the fintech world. So you might've heard of them or seen ads. They're being put out by companies like Betterment,

Wealthfront, SoFi. These are robo-advisors and investment companies. And so far, the cash management accounts from these companies have paid slightly more than even online savings accounts, although they work pretty much the same way. Okay, that's really interesting because I haven't really heard of a cash management account before. Can you break out a little more of how these work and how they might be different from a high-yield savings account? Sure. So they're kind of like a checking and savings account mashup. They combine many of the features of each. So they often come with a

debit card, sometimes even the ability to write checks if that's something you still do. And they pay interest rates that are similar to or in some cases, even a little higher than an online savings account. And they're definitely higher than what you'd earn in a typical checking account, which, as you probably know, is often nothing. Next to nothing. Yeah. Right. They also have FDIC insurance.

And actually, many of these newer accounts are offering FDIC insurance that is much higher than normal because they sweep your money into a bunch of different partner banks. So you might get up to $1 million in coverage. Most of us don't need that. But you know, it's fun to talk about and one can dream. Yeah, that's pretty swanky. Okay, well, with any sort of product like this, I'm just inherently skeptical. So I'm wondering what cons there might be. Yeah, I mean, it makes sense to be skeptical. So the cons are really similar to any of the cons you'd find with an online bank, right? So you can't walk into a branch,

you can't talk to a teller. You're not going to get a lollipop. Wait, but that's the best part about going to the bank is getting a lollipop. It's true. And my kids would totally agree, but they've never even been to a bank. So I don't think most people find that really necessary. And you can buy your own lollipops with all the money that you're going to earn in interest by switching to an online bank. But seriously, I mean, it is important to point out that, you know, not all of these cash management accounts are the same. They don't

all pay high interest rates. The ones that we're seeing that pay high rates right now are coming from those fintech companies I mentioned earlier, like robo advisors, but well known brokers, big name brokers like Fidelity and Charles Schwab, they have long offered accounts like these, and they often pay lower rates. So make sure you shop around, compare rates, and look at you know, all the accounts and providers that are available to you to pick the best one. Okay, got it, got it, got it. So we've broken down a couple good options for Miriam if this 3k is her emergency fund. But what if Miriam is just sitting pretty and this isn't her emergency fund, she just has extra cash laying around? What easy options does she have to make more money off this cash that's just sitting in her account? Sitting pretty is when things start

to get really exciting. So Miriam, if this is just extra cash, and your primary goal is to grow it, you can start thinking about investing. But investing is also when people tend to get sort of paralyzed because they don't know what to invest in. They don't know where to invest. And all of these unknowns sort of just make them nervous. And so they tend to stick with what they know, which is that savings account. Right.

And the whole world of investing, from the, at least, can be extremely daunting. I saw a recent survey from TD Ameritrade that found that 50% of millennials aren't investing at all, even in a retirement account. And I think that we're all still pretty scared from the financial crisis and afraid that more white collar criminals will just rob us blind if we do invest. But that said, there are some easy ways to get started investing, right? Right. So I totally get that fear. I was writing about investing and other personal finance issues during the recession, and it was super scary. So I totally get the fear. And I had money invested, and I watched some of it disappear. But I also think it's really important to note that all of that money is back and then some. So anyone who stayed invested

during the recession or any other sort of market downturn or turbulence came out on top in the end because the market goes down, but it also always comes back up if you stay patient. But you have to stay patient and that's really hard. So, you know, outside of that fear and that sort of inability to stay patient through the market's downturns, people also seem to have a hesitation because they think investing is really complicated. But actually, the truth is that it has never been easier to start investing, even if you don't know how. Why is that? That's because there are all sorts of services that can help you right now. And most of them are very cheap. Some of them are even free. So these are kind of the same companies that are putting out the cash management accounts I mentioned earlier. They're called robo-advisors and their core service is really

investment management, which basically means they do the investing for you. So how that works is you would open an account with a robo-advisor, tell them a few things about yourself, like how much money you have, what your goal is, how much risk you want to take, and then they pick out investments for you. They build a portfolio, which is really just another word for your investment account. And then they manage it as needed. So you don't really have to lift a finger. Okay. But I do want to circle back to the risk factor here for a minute, because I think that's going to be one of the biggest deterrents for folks. How do you think about potential risk of investing?

So there's always going to be some risk when you're investing, but I think about it in terms of the risk of not investing, which is actually much, much bigger, especially if you have a long time horizon. So let's say you stick like $3,000 under your mattress, Mariam, and you leave it there for 40 years. In 40 years, you'll still have $3,000, but it might actually be worth less than half of that in terms of what you'll be able to buy with that money because of inflation. So that's a risk that people don't really think about. You could lose half or more of your buying power by not investing to grow your money. And with investing, there's almost no scenario where you would invest $3,000 for 40 years and end up with less than that original $3,000. In fact, you have almost 100%

chance of at least tripling your investment. Okay. Yeah, I can go for that. So definitely seems at least marginally safer than running into traffic with your eyes closed. So let's, yeah, let's say Miriam feels fine about her risk factor and wants to entrust a robot to invest her money. How much is that going to cost her? So they're pretty inexpensive because they're using computers instead of humans to do all the work. So you might pay a quarter of a percent. So that's like $7.50 per year for $3,000. And you'll be invested in the stock market where long term you'll earn much higher returns than a savings account. So that $7.50 is going to be worth it. There are even services that will do this for free, like SoFi, Automated Investing, or Charles Schwab. Okay, that's really reasonable, actually. I guess probably because robots don't

need healthcare and that cuts down on costs. Yeah. But beyond risk, the other factor that seems important to consider here is time. If Miriam goes the robo-advisor route, she should expect to keep her money in that account for at least five years, right? Yes. Thank you for pointing that out because it's so important. With a short time horizon, you're probably not going to have the time to ride out market volatility and give your money the time it needs to bounce back from that volatility. So this is about investing the right money for the right amount of time. And that means money you won't need in at least five years, not your emergency fund. Okay, that's a great bit of advice.

And so Miriam, I think that we just laid out some pretty solid options for you. And I hope this helps you figure out how you can make more money from your money. And when that happens, give me a call and maybe you can treat Ariel and I to a nice dinner as thanks for your newfound riches. Yes, please. And with that, let's get to our takeaway tips. All right. First, if your emergency fund isn't earning you a lot of interest, look into a savings account at an online bank since those tend to have higher interest rates. Cash management accounts are a good option too. They're really similar, so I'd really just compare interest rates and go with the highest option.

And if you already have your emergency fund and you just have some extra cash lying around that you want to make work for you, try your hand at investing. You can start with less than Merriam's 3K, even around $100 will do. Just know that you should plan to leave that money invested for at least five years. And if you're scared or you don't know where to start, consider trying out a robo-advisor for some cheap help. They'll do all the work for you and you can mostly just sit back and let your money grow. Okay, that is all we have for this episode. Do you have a money question of your own? Turn to the nerds and call us or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at podcast at nerdwallet.com and visit nerdwallet.com slash podcast for more info on this episode. And remember to subscribe, rate, and review us wherever you are getting this

podcast. And here is our brief disclaimer thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. Thank you for reading that, Arielle. And until next time, turn to the nurse.