I just noticed that our brokerage, Interactive Brokers, offers interest on cash balances. They have an initial tier of currency you have to hold which pays nothing, but then a low rate is paid on the rest. They also have a minimum Net Asset Value (NAV) to receive the full rate. Essentially, if you have a minimum NAV of $100,000 USD and $10,000 USD of cash uninvested any cash you add on top of that will accrue interest.
It’s not a life changing amount of interest, but it has given me an idea regarding our emergency fund. The interest rate for us would be just over 1.4%. This isn’t going to be retire early money, but given that the S&P500 funds we invest in only spit off about 2% of dividends each year, it’s not money to be ignored!
Additionally, it does not come with the withdrawal penalties that something like a money market account might have where you lock money away for 1-24 months. Interest rates on those are ever so slightly higher, but surely if you locking your money away is the opposite of what you want for an emergency fund??
The other upside to Interactive Brokers is the outrageously cheap ForEx fees. This is good for us expat types as we have all our international bank accounts linked to it. The brokerage can be used to convert and move cash to where we need it. We used to split our (admittedly tiny) emergency fund between the U.K and here in Asia. The ease of using the brokerage as a middle man, as well as the potential for earning far more interest than in our regular bank accounts, has meant moving the money to the brokerage is an attractive proposition.
The potential downside
The specific downside for Interactive Brokers is pretty minor – only a single withdrawal is free each month. I guess this just means don’t have two emergencies in a month?? We don’t anticipate or see any reason why this would be a problem for us personally. Even if we did withdraw more than once, the cost is fairly small – less than the fees our banks would charge to move money internationally.
For some, this whole premise may not be a great idea. Swing traders are unlikely to ignore a large stash of cash just sitting in their investment accounts. The market has been so volatile this year that I expect the temptation to spank a load of the cash on cheap stocks in the event of prices tanking to be high. However, as long as a disciplined approach is taken this should be a way of earning at least a little on cash that is otherwise just being eaten by inflation.
We decided recently to increase our emergency fund (from very little) to about 6-10 months of expenses. This is less for emergencies and more because we are encountering some unexpected baby costs. This includes things like flights home and health insurance while Shortbread is on maternity leave. There is some irony in our being quite stressed when we were calculating these costs and wondering if we had enough cash to cover them – we had just written our financial firewalls post!
We will be going down to one income for a while and, given how I obsess and over-plan everything, having some accessible cash to cover anything outside our tight budget makes us feel a whole lot better. I’m sure we’ll write in the future about the system we will use, but it’s absolutely certain that this would be almost impossible without tracking software. Shout-out to the self-hosted Firefly III – perhaps a review in a future post.