What else can be done?
In order to improve your financial standing and knowledge, there are a couple of things you can do besides the long term investing strategies I mentioned in the beginner’s guide.
Park your cash
Keeping cash is not the best idea. In the current times of varying inflation, keeping money as cash slowly loses value. Luckily, there is a way (for the most part) to have your cash beat the inflation rate: Money Market funds. Since the Federal Reserve will raise interest rates to combat inflation, you can take advantage of these rates in a fund that holds value and is always* matched to a dollar.
Take FDLXX, the Fidelity Treasury-Only money market fund. Fidelity buys large amounts of US Treasury bills and coupons, and uses them to back their money market fund. You can buy and sell them in dollars and the price does not change. The benefit is you get very close to the actual interest rate in effect. The annual percentage yield (APY) for FDLXX is ~5% as of April 2024. This means you will get ~5% in interest over the course of a year. For a balance of $10,000, you will get ~$500 a year. For a quick comparison of rates and how much you would earn on a $10k balance in a year:
| Institution | Chase | Bank of America | Wells Fargo | USAA | Discover | FDLXX |
|---|---|---|---|---|---|---|
| APY | .01% | .04% | .25% | .1% | 4.25% | 4.98% |
| 1yr 10K | $1 | $4 | $25 | $10 | $425 | $498 |
Here’s the kicker. The banks are keeping the difference between the interest rate and their APY. The current rate is ~5.5% in April 2024. This means Chase is pocketing the 5.49% in interest and giving you a whole DOLLAR a year, keeping the other $549 for themselves.
Taxes on interest
If you make more than $10 on interest, it gets reported to the IRS and you have to pay taxes on it. However with FDLXX, since it holds 93% in Treasury obligations you will only have to pay state tax on 7% of the returns, meaning you pay less tax. These numbers will be noted on your brokerage’s tax forms (1099-INT).
More on Money Market Funds
*Regarding the “always a dollar”. Since the investments in a fund are not cash, there is a small risk that a fund can “break the buck”, where the fund becomes valued at below a dollar and you investment is worth less. This is a very small risk and has only happened 3 times before the 2008 Financial Crisis. During the Crisis, there were several funds that Broke the Buck, but the Government stepped in to ensure that the issue was dealt with and set up a temporary FDIC-like system to ensure the money was safe. You should know that this risk exists, however unlikely it may be.
When I asked an actual Financial Advisor if it was a dumb idea to store all of my cash in a Money Market fund, his answer was “Yes, because you shouldn’t be sitting on that much cash.” His only view of a downside to investing in a MMF was because the lack of investments which would yield a higher return. I am not one of his wealthy clients, so I am sitting on reasonable amounts of cash and investing what I can. I imagine you are in a similar situation if you are reading this. If you are not and have <$100k in cash just sitting there, talk to a financial advisor to help you out and get more out of your money.
OK, but how do I do this?
You can direct deposit or open a brokerage account just for your savings, or for both checking and savings. In Fidelity, you can treat these accounts like bank accounts because they have account and routing numbers, a debit card, and will auto-liquidate FDLXX when you make a withdrawal.
Whenever you deposit into the account, just make a buy order for the amount you deposited.
I swear it’s that simple. I do all of my banking at a brokerage because it meets all of my needs while giving me better returns. And with Fidelity, there are no fees on their accounts so you don’t have to worry about minimums or weird things from keeping you from managing the money you want to.
Keeping up with your retirement accounts
If you make < $138,000/yr, you should be contributing to a Roth IRA instead of a Traditional IRA. This retirement account lets you contribute after the deductions from your paycheck (“post tax”, from your take home that gets deposited to your bank). Any investments in this account will be tax-free as they grow. If you are above that, you should be contributing to a Traditional IRA. The investments in the retirement accounts should be the ones I mentioned in the beginner’s guide.
If your employer offers a 401k with matching, take advantage of it. The bonus on your initial investments compounds over time. Your strategy for your employer sponsored should also be somewhat similar to the beginner’s guide strategy.
Disclaimer
Of course this is not financial advice, just for education. If you need a professional, go see one. I am not liable for your choices and decisions. This is a crappy blog that no one reads, not an investment institution or advisor.