Get a Higher Interest Rate for The Idle Cash In Your Brokerage Account
Published 9/21/07 (Modified 3/8/11)
Are you like me? Do you keep idle cash sitting in your investment brokerage account while waiting for a juicy investing opportunity to come along? If so, you might want to make sure that idle cash is getting the best interest rate it can.
The stock market's been volatile lately so I've chosen to park a sizable amount of cash in my primary investment account as I wait for the right buy opportunity. But if you're like most people who adopt an old fashioned buy and hold strategy, you might not realize how low of a return you are getting on that idle cash. Your cash pile may be missing out on some great opportunities as it sits parked in your brokerage account. That's because many brokerages only pay you a pitiful rate of return on idle cash by default. Oftentimes, brokerages pay an interest rate as low as 1%, while they make a bundle by investing your money for themselves.
Upgrade to a Higher Interest Rate Money Market Account
If you want a higher rate of return you must ask your brokerage because usually most deposits are automatically swept into a low interest holding account by default. If you don't contact them and ask, they have no particular incentive to let you know that you have higher interest rate options for your idle funds. For starters:
- Research higher yield money market accounts. Most brokerages have a selection of money market funds that will provide you a higher but stable rate of return while you decide on your next investment move.
- Try thinking about putting the idle cash in a tax exempt municipal money market account. Depending on your tax bracket, you may want to consider moving your money into one of the many municipal money market accounts. There are two types - one type allows interest to be exempt from federal taxes and the other state-specific type allows earnings to qualify for state and local income tax exclusion. The pretax yields are usually lower than a taxable money market's yield, but the tax savings may be worth it, depending on your marginal tax bracket.
Using Fidelity Investments' Default Cash Account As An Example
For example, I use Fidelity as my primary brokerage account. Transactions and deposits to my account are automatically processed and cleared through the low interest core FCASH account by default. According to Fidelity, there is no way to automatically sweep funds from FCASH into a higher interest rate money market fund such as Fidelity Cash Reserves (FDRXX) for one time deposits. You have to manually buy into the money market fund.
The difference in rates of return can be quite remarkable though. The current yield for FCASH taxable interest bearing account, as of September 18, 2007 was only 1.50% for balances less than $50,000 (click here for current FCASH rate). Compare this to the much higher average seven day yield for FDRXX as of September 20, 2007, which was 5.09%.
Don't let your money sit like a coach potato. Put it to work!