3 Ways of Investing Cash in Your Brokerage Account in 2022

The cash in your brokerage account is rapidly losing value as inflation is rising. Here are three things you can do about it.

SustainFi   Updated January 7th, 2022

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Where do you put cash in a brokerage account?

Many investors keep some cash in their brokerage account. Maybe you sold a stock or fund that went up and haven’t yet decided how to invest next. Or, perhaps you just like having a buffer.

But keeping cash in your brokerage account is not a good idea. Depending on who your broker is, the cash in your brokerage account likely earns only 0.01%, if even that. In fact, many brokerages make a lot of money on the uninvested cash in your account by investing themselves and keeping the interest. This is a reliable source of revenue at a time when brokers no longer charge commissions for trading. In the meantime, if inflation is rising, like it is today, the real value of the cash in your account is declining.

So what should you do?

First, go to your broker’s website and check what interest your cash is earning (or not earning.) Most likely, it’s nothing. Then take a look at the following options.

1. Invest in a money market mutual fund

In the past, investors were often told to put the cash in their brokerage account in a money market mutual fund. Money market mutual funds invest in short-term, safe debt. Many brokers used to sweep customer cash into a money market fund by default. Some, like Fidelity, still do. But putting spare cash in a money market mutual fund is not such a great idea today.

First, the interest money market funds are earning is very low.

Second, even if no one charges you fees when you buy the fund, you still pay the fund’s annual management fee. That fee can be material relative to the interest the fund is earning. For example, money market funds from Fidelity and Vanguard – SPAXX and VMFXX – cost 0.15% and 0.11%, respectively ($15 or $11 on a $10,000 investment each year.) The fund may cost you more than what you are earning in interest, which is not a great position to be in.

For example, Fidelity invests unused cash in a money market fund called Fidelity Government Money Market Fund (SPAXX). SPAXX invests in super-safe, short-term U.S. government bonds. However, the fund is currently earning 0% interest net of fees. Another popular money market mutual fund, the Vanguard Federal Money Market Fund (VMFXX), is also earning 0% interest net of fees.

Money market funds are considered to be very safe because they invest in securities issued by the U.S. government, which is unlikely to default soon. But they are not the same as money market bank accounts, which are FDIC-insured for up to $250,000.

Money market mutual funds can, in theory, lose value. (Your brokerage account should be SIPC-insured for up to $500,000. However, SIPC protects you only if your broker fails, not if your investments lose value.)

An alternative to a money market fund is to buy a short-term bond ETF, such as the iShares 1-3 Year Treasury Bond ETF (SHY). Short-term bonds are less likely to lose value if interest rates rise. ETFs, which trade like stocks, are easier to buy and sell than mutual funds.

And ETFs don’t have a minimum investment. For example, Vanguard requires an investment of $3,000 to buy the Vanguard Federal Money Market Fund (VMFXX). But, again, you won’t earn much in return. SHY is currently yielding only 0.55%, for example.

2. Find a broker that pays a higher interest

Many investing apps and brokerages are blurring the lines between investing, checking, and savings accounts. If you set up an investment account with a financial company that offers investing and banking, you can set up seamless transfers between your brokerage and your bank account, where your cash can earn interest.

SoFi, a financial company that started with student loan refinancing, offers investment, retirement, bank accounts, a robo-advisor, and loans. SoFi Money, the cash management account, lets you earn a 0.25% APY. (In contrast, Fidelity’s Cash Management Account pays only 0.01%.) SoFi Invest, the brokerage, lets you trade stocks, ETFs, and cryptos. You can easily move cash between SoFi Money and Invest accounts using the app.

🔔 Learn more about SoFi Invest or sign up here.

M1 Finance is a financial company that offers brokerage accounts, retirement accounts, customizable portfolios, margin loans, banking, and credit cards. With Smart Transfers, you can set up rules for when to move cash between your investment and bank accounts. The brokerage offers commission-free trading in over 6,000 stocks and ETFs, and the cash management account, M1 Spend, lets you earn 1% APY on your cash. (Getting 1% APY requires becoming an M1 Plus member, which has other perks but is not free after the first year.)

🔔 Learn more about M1 Finance or sign up here.

You can find other options, too, if you do some research.

3. Transfer cash to a high-yielding bank account

If you don’t need the daily liquidity, consider moving the extra cash out of your brokerage account and putting it in a high-yielding bank account. High-yielding bank accounts pay more interest than brokerage accounts or money market mutual funds. And, unlike money market mutual funds, bank accounts are FDIC-insured for up to $250,000.

For example, Quontic Bank, an online bank that is also a socially responsible Community Development Financial Institution (CDFI), is offering a high-yielding checking account with an APY of 1.01% (one the first $150,000).

🔔 Learn more about Quontic or check out the High Interest Checking Account.

For lower balances, Aspiration, a green bank that doesn’t fund fossil fuels, lets you earn between 3.00% and 5.00% APY on the first $10,000 in your account.

🔔 Read the review of Aspiration or check out their site.

For the highest APY, you can buy a Certificate of Deposit (CD), which pays guaranteed interest, from your bank. However, a CD will lock your money in for a period of time, with penalties for early withdrawal. So a CD is not ideal for the money you might need soon. CDs also have a minimum investment. But they may still be attractive. Quontic offers CDs paying up to 1.20% with maturities between 6 months and 5 years. The minimum investment is $500.

🔔 Learn more about Quontic Bank CDs.

Is cash safe in a brokerage account?

Most U.S. brokerage firms are required to be members of the Securities Investor Protection Corporation (SIPC). SIPC will protect you against the loss of up to $500,000 in cash and securities, including up to $250,000 in cash, if your brokerage fails. SIPC does not protect against the decline in value of your investments. Note that crypto wallets are not covered, either.

🔔 Looking to try a new brokerage account? Check out the top 10 investing apps.

NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.

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