When I wrote my orginal post Show Me The Money: Six Strategies to Put Your Cash to Work, one of the strategies I included was leveraging General Electric's high-yield money market account for the cash you want to keep readily available (i.e., cash you might need to access in the next 3 to 12 months). But GE has shut that program down as an overall strategy shift away from its GE Capital business, and so I was left searching for an alternative. In this post I'll detail what corporate money market accounts are, how they work, how they differ from other types of savings or income generating accounts, and which the best alternative is. I'll also tell you what I ultimately ended up deciding to do, which was different than I expected.
Why you should care about this at all:
One of the mistakes I made in my 20s was not being curious enough about financial instruments, and how I could leverage them to reach my personal goals faster. I was so focused on building startups that I didn't pay enough attention to how to optimize my investments. I set out to change that in my 30s, and I've been blogging about it in the hopes that anyone else who isn't yet leveraging these tools can learn about and use them.
As with anything in life, from optimizing your health to optimizing your finances, you have to start with a goal. My family's financial goal is currently optimized for asset growth, with a secondary focus of passive income generation. Since we're still (relatively) young, we're willing to take aggressive stances on both. Here's how this breaks down for us:
- A bulk of our assets are in equities, which we do via 'robo advised' Electronically Traded Funds (ETFs), with the risk dial turned up to '10'. This allows us to reap the benefits of general long-term gains in the stock market over time, while taking advantage of advanced functionality like Tax Loss Harvesting. The two leaders in this space are Betterment and Wealthfront. I've tested both and greatly prefer Betterment. Here's my blog where I detailed why.
- Some people also turn to real estate, or investing in startups in this asset growth category; I talk more about that in my original blog post.
Passive Income Generation:
- We also have a big chunk in Peer to Peer lending via LendingClub for passive income generation, which returns about 10% annually. We use LendingRobot to create sophisticated lending rules. I wrote an in-depth blog about how LendingRobot works here.
- Some people also turn to equities that pay dividends in this category; I talk more about that below.
But what do you do with cash that you want to have more readily accessible, but you don't want to put at risk using the options above? For example, you may want to have 3 to 12 months of living expenses stashed away somewhere where you can access it in a pinch. You could put it into an FDIC-insured savings account, but the return is absolutely dismal -- the average bank savings account return is a crummy 0.06%; basically nothing. Alternately, you could put it into a CD, but then it's locked up for the duration of the CD, which defeats the purpose of having readily accessible cash. This is where these corporate money market accounts come in handy.
What corporate money market accounts are (and aren't):
This article from the WSJ explains these accounts (and their risks) well:
"With these corporate accounts, you essentially lend your money to the companies, and they in turn reinvest your money in higher-yielding investments, such as equipment leases to corporations or car loans to consumers. Because the corporate money-market account's debt is backed solely by the company's promise of repayment, investors in corporate money-market accounts are paid higher yields than they could fetch in traditional money-market accounts, which are typically insured by the FDIC."
That last sentence is important -- these accounts are not insured by the FDIC. This means if the company goes bankrupt, your money is at risk. You have to be ready to take that risk, which is why I recommend these accounts only for short-term cash allocation (cash you want to have access to that you think you could need within the next 3 to 12 months). Also important to note is that interest income is taxed at your ordinary income bracket (vs. stocks that you hold for a year or longer, or qualified dividends, which are taxed at a long-term capital gains rate).
Since GE recently stopped offering its money market account, I went on the hunt for other options. Here are the most reputable ones I found:
- Ford's "Interest Advantage" account: Currently returning 0.95% under $15k invested, up to 1.06% over $50k. Electronic sign-up and access.
- Caterpillar "PowerInvest" account: Currently returning 0.80% under $5k invested, up to 0.90% over $50k. It appears you have to mail in an application.
- Sallie Mae Bank: Sallie Mae offers an FDIC-insured money market option which returns a flat 0.90%. There's an entire list of similar options on NerdWallet.
- Duke Energy also offers a PremierNotes money market account that returns 1.11% to 1.26%. However, I just can't justify investing money with it considering the purposeful environmental harm it's wrought, so it's off the list for me.
- I've heard that IBM, Walt Disney and AT&T offer programs like these, but I couldn't find any info on them. Please let me know in the comments if you do.
The winner of this batch is Ford for its high returns, relative company stability and ease of use. Sallie Mae Bank comes in a close second (and probalby comes in first if the FDIC protection is a must-have for you).
An alternate approach -- and the one I ended up choosing:
If you're willing to roll with the ups and downs of the stock market, but would still like some passive income generation, a good option would be to choose a stock which pays a dividend. This means that the stock throws off a cash payment, usually on a quarterly basis. (Not all stocks pay dividends). A good option here is the Vanguard High Dividend Yield ETF (NYSE:VYM), which is currently paying a 3.11% yield. This ETF invests in a basket of stocks that all pay dividends (its ten largest holdings are currently Microsoft, ExxonMobil, Wells Fargo, Johnson & Johnson, GE, JP Morgan Chase, AT&T, P&G, Pfizer and Verizon), with a low expense ratio of 0.10%. An ETF, while it's a basket of stocks, trades under its own ticker symbol and acts like a passive mutual fund, with much lower management fees than mutual funds charge. I recommend you trade stocks using the Robinhood app, which provides $0 commission fee stock trades. Another benefit of buying dividend-paying stocks is that qualified stocks (like the Vanguard ETF) get capital-gains treatment on income instead of ordinary income treatment, lowering your tax bill. The downside of this approach is that your cash is tied up in equities, and if the market tanks, the value of your investment will fall.
Since our family's primary goal is asset growth, i'm taking the cash we had in the GE corporate money market account and moving it to the Vanguard ETF. While it's subject to the ups and downs of the stock market, it also provides passive income at a 3x higher yield and a lower tax rate than the other corporate money market options above, and since it's an ETF, it's easy to move in and out of the position quickly, meaning the cash is readily accessible when we need it. I wasn't expecting to go this route before I did my research, but it just goes to show the importance of setting a goal and then comparing your available options to your goal to make the right decision for you.
Lastly, at the end of the day, what matters most is that you start thinking about these things if you aren't already. I'm not an expert in these areas, and I'm learning as I go. I'd welcome comments from those who are experts in the comments -- whether you agree or disagree with my approaches.
The picture above is one I recently took in Hawaii at a friend's wedding. Since this post is about optimizing your finances for the benefit of your -- and your family's -- financial goals over time, I thought the symbolic nature of a wedding and the long-term commitments it produces was a great illustration of the importance of diving into these topics.