Interest rates were so low for so long it has been easy not to think about the unused cash sitting in your checking account. With that said, they have increased over the last couple of years and now provide good returns for cash like investments. This means that small businesses with surplus cash, even if only temporarily, can earn additional income by transferring it to interest bearing accounts at their bank.
Here are 4 effective ways to put your cash to work:
EVALUATE YOUR CHECKING ACCOUNT
First, check the interest rate on your current checking account. With interest rates rising, it’s crucial to know if your checking account is providing competitive returns. If not, transferring some cash to other interest-bearing accounts might be more beneficial. You may find you are already earning a great rate, but knowing what it is will help you decide if any of the following make sense for you.
MONEY MARKET FUNDS
Money market funds are a flexible option for earning interest on your cash. While their rates may be lower than CDs (Certificates of Deposit), they offer greater liquidity and easier access to your money. If you already have a money market fund, check the rate against current market rates including CD rates – and consider asking your banker for a higher rate. I have had success doing this for my clients.
CERTIFICATES OF DEPOSIT (CDs)
CDs provide a guaranteed return over a fixed period. To optimize returns and manage liquidity, consider staggering the maturity dates. Split your cash into smaller CDs with different maturity dates instead of putting it all into just one CD. This strategy ensures that you’ll have access to some of your funds periodically.
For example, if you have $30,000 to invest, consider dividing it into three $10,000 CDs. Monitor each CD's maturity date closely and decide whether to reinvest in a new CD, move the funds back to your checking account, or choose a CD with a different maturity period. Banks often have CD specials where they offer the best rate on, say, a 7-month CD. When that CD matures, the best rate might now be on a 9-month CD. If you're not attentive to your CDs, you could end up reinvesting at a lower rate for a 7-month CD when you would have been willing to move to the 9-month CD for a higher rate.
Additionally, check in with your bank and inquire about penalties for early withdrawal, as some banks may penalize you on the total interest while others on just the portion withdrawn. If it is just the portion withdrawn it won’t hurt as much if you need emergency cash.
DEBT PAYMENT
Another productive use of your cash is to pay down your highest interest loans and credit card balances. By doing so, you effectively earn a return equal to the interest rate of the debt you’re paying off. This can be a smart move, reducing your overall interest costs and improving your cash flow.
Here are 2 tips for managing this process with your idle cash:
WATCH FOR CASH FLUCTUATIONS
One challenge of managing idle cash is the potential for fluctuations in your cash flow. Stay vigilant and be prepared to move funds back quickly if your business requires immediate cash. Having all of your accounts in one bank makes moving money easier.
TAKE ACTION REGULARLY
Every day you delay moving your cash to a more productive use, you’re missing out on potential interest income opportunities. While the extra daily interest you would earn may seem small, it’s important to remember that it adds up over time.
For personalized advice and to explore the best options for your situation, consider consulting with your banker, fractional CFO, or accountant. They can provide recommendations to help you make the most of your idle cash and enhance your bottom line.
(P.S. tap the photo below)
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