The Error-Proof Portfolio: Wring a Little Extra From Your Cash

Maybe your office, home, and car are all as neat as a pin. But you might still have a mess on your hands and not know it. And cleaning up that mess can help you earn extra money.

No, I'm not talking about ferreting through your basement and selling stuff on Craigslist (though I do vouch for that strategy, too). Rather, if you haven't been paying close attention, the cash holdings you have in your investment accounts may have gotten a little sloppy, with little cash pools spread out in accounts at various banks, a few different brokerage firms, and assorted mutual fund companies.

Individually, those pools of money might not look like much, so even if you're not earning much on your cash--or nothing at all--it may not seem worth your concern. But you might be surprised by how all those small cash accounts can add up. Assuming you don't have an immediate need for the cash in a particular account where you're earning close to nothing, it's well worth centralizing those assets into the highest-yielding investment you can find. By shopping around and consolidating, you may be able to qualify for higher-yielding products that are unavailable to those with smaller sums to invest, such as jumbo certificates of deposit or cheaper share classes of a given money market mutual fund.

Now, I don't want to overstate the yield pickup you'll achieve by consolidating into a higher-yielding investment. One-year CD rates at bankrate.com were recently just about 1.3%, and even good, low-cost money market funds have SEC yields that are just barely in positive territory. But 1.3% on a $20,000 investment is $260--better than the 0% you may be earning on some of your cash if you haven't been paying close attention. Brokerage sweep accounts, where your money is often moved if you sell a security and haven't specified a higher-yielding alternative, are notorious for their low yields.

Assuming you've decided to consolidate your cash holdings in an effort to pick up a higher yield, here are some key considerations to bear in mind.

Assess Liquidity Needs
You may be holding cash in your account for asset-allocation reasons. But you may also be holding cash to meet short-term income needs or to keep dry powder in case you find long-term securities you'd like to buy. If that's the case, investigate the logistics before deciding to move money out of a given account in search of higher yields. If you'll pay transaction costs to take the money out and move it back in at a later date, that may gobble up any extra yield you're able to gain.

Ditto if you like to keep cash on hand in your brokerage account for buying opportunities: If it will be time-consuming to get the money back into your brokerage account when you need it, picking up the extra yield may not be worth your while. (Those caveats aside, it has gotten a lot easier to move money from one financial institution to another, so ask pointed questions of your various financial providers rather than assuming you'll necessarily incur extra time or costs.)

Also be sure that your new higher-yielding vehicle doesn't impose onerous costs if you need to take your money out before a specific period of time has elapsed. Interest rates on CDs are invariably higher than is the case with money market accounts and other savings vehicles, for example, but that's because you'll pay a penalty to pull your money from a CD prematurely.

Gauge Additional Costs
Yes, you may be able to pick up a higher yield on your cash by consolidating accounts. But before you do so, make sure that you won't inadvertently trigger other costs. In advance of clearing extra cash from your bank account, for example, make sure you won't fall below the minimum balance needed to ensure free checking and other services. If you're pulling money from a brokerage account and your balance falls below a certain level, you may no longer qualify for free trades or your account maintenance charges could go up.

Mind FDIC Guarantees
Before moving money to another account in search of a higher yield, be sure you understand what is--and isn't--covered by FDIC protection. Assets held in checking, saving, money market accounts (not to be confused with money market mutual funds), and CDs are all insured up to $250,000 per depositor per institution. This table summarizes the FDIC's coverage limits, and this page discusses what is and isn't covered by FDIC.

Shop Savvy for Yields
As you're comparing yields for various instruments, be sure to make apples-to-apples comparisons. When shopping for CDs, for example, note that the yield figures you see are annualized--if you see a six-month CD yielding 0.74%, for example, the yield you'll actually receive in a six-month period will be half that amount. Also be aware that banks and other financial institutions may offer attractive teaser rates that will remain in effect for a short period of time. Finally, it's important to understand that yield figures for money market accounts and money market mutual funds won't likely reflect what you actually earn on your money. That's because these accounts hold baskets of short-term securities, and the manager is constantly swapping into new securities at whatever yields currently prevail. If interest rates go up from here, your take-home yield is likely to be higher than the yield figure you see quoted today; if they go down, it will be lower.

Don't Get Cute
Of course, cash is a bummer of an investment right now, not even beating inflation. So if you have evaluated your income and emergency-fund needs and found that you have more in cash than is necessary, by all means consider a higher-yielding alternative such as a high-quality short-term bond fund. But for money you can't afford to lose, whether it's for next semester's tuition payment, an upcoming tax bill, or your own peace of mind, cash is king. This article discusses why patience is a virtue for money you must keep safe. 

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