With interest rates reaching levels not seen in years, now is a good time to assess where you are parking your money. Some securities and accounts offer newly attractive annual percentage yields (APY), while other types of securities and accounts offer next to nothing. As interest rates rise, so does the opportunity cost of leaving your money in these nearly empty accounts, especially some swipe accounts. Here’s what you need to know about the downsides of swipe accounts and some great alternatives. Consider working with a Financial Advisor while you work to make your money work for you.
Understanding Swipe Counts
A swipe account is a special type of account that can be linked to a bank account or a brokerage account. Depending on the brokerage, you may be able to use a swipe account to hold:
New deposits that you are not yet ready to invest
Dividend payments that you choose not to reinvest
Proceeds from the sale of securities in your portfolio
Funds Exceed Target Brokerage Account Balance
Some robo-advisors that offer swipe accounts can even swipe funds to low-risk exchange-traded funds (ETFs). This allows you to keep your money in the market, but in the safest way possible and potentially with lower expense ratios than traditional mutual funds.
Disadvantages of Swipe Accounts
There are a few downsides to many swipe accounts. For one, they typically receive ordinary dividend distributions, which are often low-yielding accounts. If you have a swipe account for convenience, be sure to transfer the balance from these accounts frequently due to their low yield.
Another potential downside to scanning accounts, whether from a brokerage or a bank, is that there may be fees. Some swipe accounts are free, but many are not. Looking at the fine print on swipe accounts can help you understand what you’ll pay to maintain it. If the money in your swipe account is invested in money market funds or ETFs, it’s also important to check the expense ratios for these so you know what they will cost you to own each year.
Alternatives to Swipe Accounts
Here are five common alternatives for scanning accounts:
Online savings accounts. Online banks, which do not have the burden of having to maintain branches, have an advantage over traditional banks in terms of the benefits and interest rates they can offer. However, not all online banks may be suitable for you. For example, in October 2022, Bask Bank was offering an APY of 3.05%. You can find the best rates for online savings accounts here.
I have obligations. Known as the Series I Savings Bonds, or iBonds for short, they come in terms ranging from one year to 30 years. This bond has two rates: a fixed rate, which is always zero, and an inflation rate, which is linked to the consumer price index for all urban consumers (CPI-U). Interest earned every six months is added to the principal value of the bond. In addition, in May and November, the Treasury adjusts the inflation rate of this bond according to the latest reading of the CPI-U. In October 2022, iBonds paid a Interest rate of 9.62%.
Certificates of deposit. One way to save and grow your money is to use a certificate of deposit (CD). These low-risk banking products essentially lock your money in for a specific period of time in exchange for an interest rate. CDs are offered at many financial institutions, including banks and credit unions, with their APYs generally being among the strongest. You can compare competitive rates here.
Goods of treasure. Treasury bills are short-term securities, meaning they come with shorter maturity dates than bonds and notes. Some types of treasury bills have a maturity period of only a few days, but they are usually issued in terms of four, 13, 26 or 52 weeks. Treasury bills are assigned a specific face value, such as $1,000, $5,000, or $10,000, but you can usually buy them for less than that. The amount you pay is called the discount rate. Once the securities have matured, the government remits the full amount of the invoice. You can buy them on the government’s TreasuryDirect site.
Money market mutual funds. Money market mutual funds are conservative investments for investors concerned about the safety of their capital. These funds invest in cash equivalents and high-quality, highly liquid short-term debt securities with maturities of one year or less. Unlike the previously mentioned alternatives for sweeping accounts, money market mutual funds are unsecured, although they are widely considered low risk and safe.
Even though some people are complaining about rising interest rates, there may be a silver lining to this trend. It’s the prospect – finally – of making your money work harder for you. When evaluating your options, keep three key factors in mind: yield, liquidity and collateral. The relative importance of these three factors is entirely individual. There is no single savings vehicle.
Tips for investing
A financial adviser can help you evaluate options for parking your money. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is best for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
Use our free asset allocation calculator to get a quick overview of the types of accounts and securities that would be wise for you to invest your money.
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