Practical Money: Getting 5% APY With A Checking Account
How my checking account is earning over 5% APY
Introduction
Last August I wrote about my 5 favorite high-yield savings accounts that are garnering an APY of around 5% or more. In this newsletter, I’ll discuss how the cash in my checking account is yielding over 5%, as well as some other high-yield checking account options that are out there that I haven’t used.
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Background
I try to have all of our free money working for us, which includes cash in our checking account. In general, most checking accounts offer a meager interest rate. We had a Chase Premier Plus Checking account for over a decade, which currently has an APY of only 0.01%. So if you averaged $10,000 in your checking account, you would only earn a whopping $1 in interest. Yes, you read that right. One. Single. Dollar.
In 2010, Fidelity began offering its cash management account, a brokerage account designed for spending and cash management. One of the features that attracted me was that they reimbursed ATM fees globally. Having been a client of Fidelity for a long time, we decided to try it out as a secondary checking account.
What is the Fidelity Cash Management Account?
In 2010, the Fidelity Cash Management Account was introduced to provide customers with features similar to those of a traditional checking account, including the ability to write checks, make deposits, use a debit card, and access ATM withdrawals, while also offering investment opportunities and FDIC insurance on uninvested cash through a sweep program.
The Fidelity Cash Management Account has no account fees or minimums. Checks can be deposited through their mobile app, and cash balances earn a 2.72% APY and are FDIC insured. That’s a 27100% increase from our Chase checking account!
The Secret Sauce: Money Market Magic
As noted, cash balances in this account earn 2.72%, and they have FDIC protection. So if you averaged $10,000 in this account, you would earn $272 a year in interest, as opposed to just $1 with the Chase Premiere Checking account.
However, this is also a brokerage account, which allows you to trade equities and put your cash in money market funds. So we keep our cash in a money market account, the Fidelity Money Market Fund Premium Class (FZDXX), which has had an average 1-year return of 5.27%. There are other money market accounts, such as the Fidelity Government Money Market Fund (SPAXX) which has a 1-year return of 5.07% and has no minimum investment requirement.
When you make a payment from the account, like for a mortgage, the account will first use funds in the cash balance (that is earning 2.7%) before using the balance in the money market account.
There is one caveat though…
All deposits in this account automatically go into the cash balance. You would then have to manually go in and move those funds into the money market account. There is currently no way to automate that.
So what I do is go into the account anytime there is a deposit and then move the money from the cash balance to the money market account. It's a bit of a chore, but hey, it's not like I have to churn butter or anything.
This rate likely won’t last
As with yields on savings accounts, money market yields tend to fall when interest rates start to drop. Right now interest rates are the highest that they’ve been in years, and the central bank has suggested that there will be an interest rate cut this year, and there will likely be more next year. With each interest rate cut, the interest earned on money market accounts will decrease. The speed and extent of this decline depend on a few factors: how aggressively the central bank is cutting rates, the type of money market fund (government vs. prime), and the specific fund's investment strategy. Some funds might be quicker to adjust yields than others, so it's important to monitor your fund's performance and compare it to alternatives if you're concerned about the potential for lower returns.
Other Options
There are other options for high-yielding checking accounts, that I personally haven’t tried out. Below are a couple:
AllAmericaBank Ultimate Rewards Checking: This has the highest APY of the checking accounts I’ve seen with up to 5.15% on balances up to $15,000. Amounts over $15,000 will earn 0.50% APY on that portion of the balance. You can read the fine print here.
Consumers Credit Union: federally insured by NCUA. You can earn between 3-5% APY on balances up to $10,000. For the 5% APY on balances up to $10,000, you must fit several criteria such as receiving eDocuments, making at least 12 debit card purchases each month, having direct deposits / mobile check deposits / ACH credits totaling $500 or more monthly, and spend $1000 or more in CCU Visa Credit Card purchases each month.
Conclusion
Getting 5% with your cash does require a little effort with the Fidelity Cash Management account, but even if you decide to skip the money market workaround, your cash could be earning 2.72%, which is 3300 times the national average interest rate on checking. You can learn more about this account here.
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That's it for this week! As always, no financial decisions should be made solely on this newsletter, which is for informational and entertainment purposes only and is not intended to be a substitute for advice from a professional financial advisor or qualified expert. If you haven’t already, please subscribe to this newsletter below and never miss an update: