I used to do this but if you aren’t aware Regulation D was removed during the pandemic which means you can use savings accounts exactly like checking accounts. Some banks will also let you store nothing in checking and auto-draw from savings when you use your checking account.
I currently store my cash with SoFi which allows this and has 4.6% returns. I made the decision to stop using a brokerage as checking a while ago but IIRC, money market accounts and HYSA accounts moved together for returns and sometimes HYSAs were better so I felt like it wasn’t worth the complication for potentially a few dollars of profit per year. I store very little cash on hand anyway since I’m able to sell raw stocks in the event of an emergency. (Selling while the market is down will still put you ahead of cash returns if you invested that part of your emergency fund a while ago).
Yeah, I’m aware, and I did try using my savings account that way for a time. However, I do find value in separate “checking” and “savings” accounts for money organization. Basically, here’s how my money flow goes:
Paycheck -> savings
Recurring transfer savings -> checking for spending
Manual transfer checking <-> savings as needed
But you’re right, you can get most of the benefit by using a savings as checking (or have checking auto draft from savings). I keep a budget, and this structure keeps me honest (I guess I could have two savings and get the same result).
However, the bank account can’t fulfill other benefits, like state tax savings on interest or the ability to invest part of my savings into t-bills or funds(I can get a CD though). I’ll also need a brokerage account regardless (I’m not getting an HSA through my bank), so this helps consolidate my accounts a bit, and it turns out the debit card is way better than any bank account I’ve had.
What happens if SoFi no longer has the best rates? You either accept that or move elsewhere. You already need direct deposit to get the best rates, when will they add needing debit card transactions as well? That kind of thing is pretty common with banks since they may not need to be as aggressive in getting deposits at some point if the loan market cools. I think that’s a lot less likely to happen at a brokerage, and even if it does, I can just buy other assets, like CDs , Treasuries, etc. So I expect the brokerage to offer a better product more consistently.
I’m not saying anyone should switch immediately, only to consider a brokerage the next time they go shopping for a new account.
Selling while the market is down well still put you ahead of cash returns
I don’t think that’s necessarily true, it all comes down to when you’re likely to need that cash and how much the market has tanked. By the time you have enough assets that the difference doesn’t matter, you also have enough assets where the extra you’d potentially get by investing it doesn’t matter.
Regardless, that’s not really what this is about. I’m discussing bank vs brokerage account, not investing vs not investing cash reserves…
I keep a budget, and this structure keeps me honest
It’s not clear why you don’t have it all sit in brokerage checking instead of split between savings? Personally I find any sort of attempts to “trick” yourself into certain spending behaviors when it would be more optimal to do something else with better discipline to be silly.
However, the bank account can’t fulfill other benefits, like state tax savings on interest
How much interest are you making? For every 1000 you have in SPAXX, let’s say you make 5% interest on it, so $50. You can take 30% of that income off of your state taxes, so $15. Let’s say your state taxes are 5% because I’m not sure where you live, so that’s 75 cents per 1000 that you’ve saved (did I do that correctly?). Returns being 5% is highly abnormal, so this is best case scenario at the moment.
the ability to invest part of my savings into t-bills or funds(I can get a CD though).
Unless you can sell these fully liquid I don’t see the point. You might as well put it into these types of accounts normally if that’s where you want money to be. If your money is truly tied up in t-bill ladders then it seems less liquid than selling stocks.
the debit card is way better than any bank account I’ve had
Good banks have good debit cards.
What happens if SoFi no longer has the best rates?
I’m not married to SoFi, but if it was severe I would move. I already have accounts at most of the big ones so it’s not a big deal to me. Money market accounts are not guaranteed to be the highest rates either, and when I switched a few years ago HYSAs were leading money market returns. When that becomes the case will you move? Personally I don’t keep enough cash to sweat $0-10 per year.
when will they add needing debit card transactions as well? That kind of thing is pretty common with banks since they may not need to be as aggressive in getting deposits at some point if the loan market cools
This doesn’t happen at normal banks. This is common with very specific banks that offer really high returns compared to normal HYSAs. I don’t think these sorts of banks are ever worth it unless you’re holding onto a ton of cash, which I also don’t think is good.
Regardless, that’s not really what this is about. I’m discussing bank vs brokerage account, not investing vs not investing cash reserves…
It’s relevant because your entire emergency fund strategy changes when you keep most of it in a real brokerage account instead of with money market. You are talking about how to optimize your big pool of cash, but I’m saying that you should focus less on chasing 0.3% returns on your cash and more on keeping less cash around in the first place. I keep about $3-4k cash around liquid as money that I could use today if I needed to. If I need more money for an emergency, I can still cash it out of my brokerage account very quickly without needing to keep the full 6 months worth of expenses tied up in cash. Note that I have a ton of money in raw brokerage because I make too much money to put it all into tax advantaged spaces. If you don’t make enough money to outpace your tax-advantaged spaces it’s possible that you don’t have any money available to play with in raw brokerage to start with.
it all comes down to when you’re likely to need that cash and how much the market has tanked. By the time you have enough assets that the difference doesn’t matter, you also have enough assets where the extra you’d potentially get by investing it doesn’t matter.
I’m not sure what you mean by the second part but as for thinking that having your emergency fund in a brokerage account isn’t worth it: if you have very bad luck you might lose money in the short term, e.g. putting money into stocks, market crashes, then you have an emergency. Even in this case, unless you continue to have an emergency frequently and with every downturn, you will still come out ahead of cash if you continue with the strategy after your first emergency. On the flip side, in the average case if you have an emergency without the market being down or best case don’t have an emergency for the first few years, you’ll have outpaced any returns that cash will give you for quite a while, and this will continue to grow indefinitely. Stick it in bonds if you’re risk-averse, but keeping it in cash is wasting money. Cash returns are very high right now and it’s easy to feel comfortable with your 5% money market, but the calculus will change when returns go sub-1% again.