Last Updated on November 5, 2023 by Carolyn
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Even those of us who don’t have a lot of money likely have “lazy money”; money that is sitting in an account not earning any interest. Have you considered just how much income you might be missing out on by having lazy money?
Cost of Lazy Money
While interest rates were low the cost of lazy money wasn’t so staggering but now that rates have risen it can be mind boggling.
Let’s look at an example:
Jill is in the process of funding an emergency fund as well as investing a portion of her take home salary. She has decided she’s comfortable with an emergency fund of $12,000 and is in her 10th month of setting aside $1000 for this purpose, so now has $10,000 in her emergency fund which she holds in a savings account. She has also accumulated $5000 in her checking account that she’s tagged for investment but hasn’t yet invested. And lastly, she has $2000 in her checking account to pay monthly expenses. She has a total of $17,000 that is earning a paltry combined return of 1% or $170 per year.
If Jill simply moved this cash into a High Yield Savings Account she could earn approx 5% per month or $850 per year; on a monthly basis she’d be getting an extra $55 per month. And if this interest is reinvested monthly, Jill will end up with more than the $55 per month just for moving the money into a High Yield Savings Account. That’s putting your lazy money to work for you!
What are High Yield Savings Accounts?
HYSA’s are special savings accounts offered by many banks and credit unions. Some have minimum balances to open an account, some pay interest at staggered rates dependent on the account balance but all of them pay a higher rate of interest than traditional savings accounts.
Advantages of High Yield Savings Accounts
High Yield Savings Accounts ( HYSAs) come in many different flavors but most of them have the following common characteristics:
- Pay interest higher than traditional savings accounts;
- Money can be withdrawn any time ;
- Accounts are FDIC insured subject to normal FDIC limits;
- Many institutions offer account opening bonuses which can boost your effective interest rate
- The funds are safe and are not exposed to the risks of the stock market.
Disadvantages of High Yield Savings Accounts
- HYSA’s over the long term don’t earn as much as investing in a good index fund;
- The interest rate is not fixed so if the federal reserve rates fall so will the rate of return on HYSA’s.
- Many HYSA’s limit the number of withdrawals you can make a month.
How to Use HYSA’s to Get Your Money Working For You
HYSA’s are a good place to store the cash that you need quick access to, and that you don’t want to subject to the risk of stock market ups and downs. While interest rates are high they are a great place for emergency funds and other funds that you might need in the short term.
I Thought I Wasn’t Supposed to Invest My Emergency Fund?
While Emergency Funds need to be accessible it doesn’t mean they have to be lazy money. You can get these dollars working for you, they may not earn as much as other investment dollars but they can definitely go to work. You need to make sure that the funds stay accessible so that you can use them should you need them: HYSA’s and redeemable term deposits fit this bill well.
Get Your Money Working for You Now
In our example Jill had $5,000 waiting to be invested. She’d be wiser to invest that money as she saves it rather than saving up for a lump sum contribution. It has been proven that investing funds on a regular basis throughout the year will over the long run be more profitable than investing annually at the end of the year. This theory is called “dollar cost averaging “.
So if Jill is saving for a ROTH contribution or just funding a general brokerage account she should schedule monthly transfers to these accounts and start getting her money working for her now rather than ketting it languish in her checking account.
Maintaining Account Minimum Balances
Often checking accounts require a certain minimum balance to avoid monthly account fees. This balance is not normally very high, so you should always keep the minimum balance required to avoid monthly account fees.
Auto Transfer Between Linked Accounts
Many banks also have the option to auto transfer between accounts based on criteria you set. This can be useful to sweep excess cash to an HYSA and vice versa should your checking balance fall below the minimum balance threshold or even worse if you write a check that would overdraw your checking account.
Enable these features before you need them!
Hidden Lazy Money
Chances are you probably have “hidden lazy money”. Where you ask might this lazy money be hiding?
Credit Card Rewards
How about those cash-back credit cards? How often do you redeem those points? If you’re like many of us you let the points accumulate until they are a significant amount, meanwhile you pay your monthly credit card statement with your hard earned cash. For the most part this isn’t a wise idea.
Why You Should Use Your Reward Balances
First of all have you ever earned interest on your reward balances? I think not, so rewards points are “lazy money”.
Also it has happened many times that the value of points has been devalued. Airlines have often increased the amount of points it takes to fly to destinations therefore devaluing your points.
Know Your Point Values
Before you go frantically redeeming points know that there are times when it makes sense not to redeem them. Here are a few examples:
Gift Card Purchases: Most credit card reward programs offer cardholders up to 20% off certain gift cards. It’s worth checking to see what their current offerings are before point redemption, it would be frustrating to redeem the points for a planned purchase only to find that you could have purchased a gift card for the same purchase for 20% less using points.
Airline Flights: If you’re flying in the near future, and have a travel card like Chase Sapphire Preferred Card or Capital One, the points are worth 1 cent per point if cashed in but if transferred to an airline or hotel partner are worth between 1.5-1.7 cents a point.
It’s worthwhile to note that though with most hotel and airline partners points are transferred at one point per mile their buying power will vary. And their buying power will vary on different flights and hotel stays.
It is also important to know that some airline travel miles programs “expire” miles if an account is inactive for a certain period of time. Frontier accounts go inactive with only 6 months of no activity. So it’s a good idea to only transfer points to an airline miles account when you intend on booking a flight and using them.
Travel Reward Programs: Some credit cards such as some Capital One cards,Chase Sapphire and others, have their own travel portal. Travel booked through these portals usually yields better point value than cashing in points, but less than transferring points to a point partner as discussed above.
Points Disappear when Account is Closed
Remember to transfer or redeem points when closing old credit card accounts, once an account is closed the points are gone forever.
Forgotten Accounts and Unclaimed Money
Did you know that when a business owes you money but can’t deliver it to you, they must turn it over to the state. The state maintains a list of what money is being held for whom. It is worth looking up to see if you have any unclaimed money.
Unclaimed.org is a good site to start your search for unclaimed money in the US and Canada.
Enjoyed this Post?
If you’ve enjoyed reading this post and would like to read more about making your money work for you, here are a couple of great additional reads:
- Mr Money Mustache post “ Your Money Can Work Harder than You Can”.
- Rich Dad Poor Dad: Is a modern classic on building financial wealth and good financial habits.