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“Watch the pennies and the dollars take care of themselves.” This might seem irrelevant now pennies have been eliminated. The logic is still intact. Your client needs to be aware what they are getting paid on free cash balances and what they are paying on borrowed money.
Can your client (or you) answer these 12 questions or at least come close?
1. Checking account interest rate? Many years ago, brokerage firms had money market sweeps into cash management accounts. This might have quietly changed t9oday, especially at banks. If you have free cash sitting around, it might be earning 0.01% or almost nothing.
2. What is the money fund rate? High yield money funss might sound like an oxymoron today, but the account you could easily sweep free cash into might be paying a rare similar to a three month CD. This number, with instact access is constantly changing, but it might be 3.5%.
3. What does a three month or six month CD pay? Your client might need cash available for an upcoming RMD or tuition payment, When do they need the cash? Is it worthwhile toi lock in a rate and still have the money available when it is needed?
4. Much loose cash is sitting across your different accounts? The amounts might seem small, but they add up. Where does it come from? Are there stocks that should be on automatic dividend reinvestment? A substantial amount of the S&P 500 index’s total return can be attributed to dividend reinvestment. (1) However, if there is loose cash earning almost nothing, it should be put to work.
5. How much is their RMD? This is an issue if your client is over 73 ½. This should not wait until the last moment in December. Are they considering a QCD? Will they want cash for themselves? Gifts to relatives? A distribution in kind? They should know this number so they can plan.
6. What is the interest rate on their home equity loan? Many people have HELOCs. It can be a handy place to find cash when expenditures exceed income. It can also be a loan where interest is compounded. Why? Because you withdraw more to make the monthly minimum payment. What is this costing you? Does your financial services firm offer asset based lending at a better rate? Most important, what is your plan for paying it down?
7. What rate is your home mortgage? OK, you probably refinanced years ago. If people are starting to talk about interest rates going up, it is useful to know what you are paying now vs. what rates are currently available. Is it a balloon mortgage? Are their provisions indicating the rate could change? It’s good to know.
8. What are they paying in credit card interest? The average APR for cards with balances is around 22%, 23% for new cards. (2) Compare this to the 3.5% money fund rate. It’s good to be a bank. It is easy to make minimum monthly payments, but know the cost of carrying debt.
9. How much margin debt are you carrying? What is it costing you? This debit might be in place for several reasons. It might be part of your investment strategy to buy stock using borrowed money. It might be your version of an overdraft, similar to a HELOC account. You might have automatic debits? What is it costing you in interest rate terms? What is your plan for paying it off?
10. When does your next CD come due? It might be at your firm. It might be elsewhere. What are your plans? If you are going to roll it over, you will need to shop for rates. What are those rates for different maturities?
11. What has the S&P 500 returned YTD and MTD? This is useful to know when talking about the performance of the equity component of your portfolio. There are months when the market’s return is minimal or negative. You must be realistic. You cannot expect the stock market to go up all the time, yet you should be aware if your performance is lagging.
12. Are you paying ATM fees? How much? This might not be an issue if you are always sticking with ATMs from your firm. Do you use any ATM you can find on a Friday night? Out of network ATM fees are almost $5.00 when you add up what your bank and their bank are collecting. (3) How much do you withdraw? How often are you using them?
It makes sense for clients to manage their own money. They should be taking responsibility. They should take the time to know these numbers. This is another way you add value as their advisor.