What am I missing when it comes to my finances?
This is one of the most common questions we hear from prospects and individuals seeking advice, and one area that individuals consistently overlook is ensuring they earn a reasonable rate of return on their cash balances. Almost everyone we initially meet has a significant cash balance that is earning little to no interest in their checking or savings accounts.
The good news is that this is one of the easiest issues to fix and immediately adds to your bottom line. To start, it is important to understand how interest rates and the banking industry work.
The Economy and How Banks Make Money:
In the past 20 years, interest rates have been front and center. Beginning with the Great Recession at the end of 2007 into 2008, interest rates declined significantly as the Federal Reserve scrambled to keep the economy afloat. Lower interest rates made money more accessible to businesses which incentivized businesses to invest and support the economy.
The following graphic from the Federal Reserve shows the steep decline in interest rates throughout 2008. Those rates stayed near zero for the ensuing decade and have recently seen a rapid increase as the Federal Reserve worked feverishly to stem the runaway inflation that occurred after the COVID driven stimulus funding.
Source: https://fred.stlouisfed.org/series/FEDFUNDS
While interest rates are important for the economy in general, they also have a direct impact on the interest income earned by individuals in their bank accounts.
For most depository banks, a large portion of their revenue is generated by the spread they earn between the interest expense they pay on deposits in checking and savings accounts versus the interest income they earn by loaning those funds out to customers. The larger the spread, the more profitable the bank will be.
When interest rates in the economy drop as they did after the Great Recession, banks will lower the rates they pay on their deposits because the interest income they are earning on loans is dropping as well (i.e. they have to maintain the spread).
In the past handful of years as rates have started to increase, many banks have been very slow to raise the rates they pay on customer deposits in checking and savings accounts. By keeping the interest rates paid on deposits low while simultaneously raising the rates on mortgages and other loans, banks are able to increase their interest rate spread and increase profitability.
Over time, market competition may create enough pressure for banks to raise their deposit rates, but ultimately, that decision is up to each individual bank. Given the hassle that is involved with switching banks (e.g. because we all typically have multiple recurring payments tied to our bank accounts), most individuals are hesitant to move their bank accounts even if the interest rate they are earning on their current account is very low.
To demonstrate, even though the Federal Reserve has raised interest rates by over 4% since the beginning of 2022, the national average interest rate on savings accounts is currently 0.41% and on checking accounts is 0.07% (as of 4/30/2025). In other words, it is effectively zero, and some banks have eliminated paying interest on certain accounts altogether. These banks are then able to generate significant net interest income by loaning out their deposits at much higher rates. For example, a bank may extend mortgage loans to customers. With average mortgage rates of 6.81% (as of 4/30/2025), banks can earn a significant income on these interest rate spreads.
For the largest banks in the United States, net interest income generates billions of dollars for their businesses. The following graphic shows the difference between the average checking and savings deposit rates paid by banks compared to the national average mortgage rate earned on loans offered to consumers.
Clearly, the spread between what banks pay their customers and what they earn lending the money out is a very profitable business. With that in mind, the key point to understand is that someone will make money using your cash balances. Will it be you, or will it be your bank?
Key Takeaway:
Ensuring you earn a reasonable rate of return on your cash balances immediately adds to your bottom line.
How To Maximize Your Cash Balances:
There have traditionally been a few approaches to maximizing the interest earned on cash balances. When considering the options available for cash balances, there are a few factors that can be used as a framework for evaluating each approach.
- Accessibility
- Early Withdrawal Penalties
- FDIC Protection
- Interest Rate Earned
- Ease of Use
Historically, the two primary approaches were to either purchase a certificate of deposit with the excess cash or to open a high-yield savings account.
Certificate of Deposit (CD):
Purchasing a certificate of deposit can increase the interest earned on cash balances. Typically, these can be purchased directly from the bank who holds your depository account, and typically interest rates on CDs are more competitive than a standard checking or savings account. Let’s consider how CDs stack up against the factors mentioned above.
Accessibility/Early Withdrawal Penalties: One downside to CDs is that the money is tied up for a set period of time. Typically, the money can still be accessed before the CD matures, but there may be a penalty for early withdrawal such as forfeiting the last 3-6 months of interest.
Because the money is not freely accessible, individuals usually restrict how much they put into a CD to ensure they have accessible funds. For example, if an individual has $200,000 in available cash, they may only put $150,000 into the CD so that they have a $50,000 cushion. By reducing the amount they put into the CD, they are reducing the effectiveness of the CDs higher interest rate.
FDIC Protection: Additionally, individuals typically default to purchasing a CD at their current bank. For individuals with large cash balances, this can impact FDIC insurance. FDIC insurance covers deposits up to $250,000 per depositor, per FDIC-insured bank, per ownership category. This is increased to $500,000 for joint accounts.
Because the limit is per depositor and per bank, simply opening a similarly titled account or CD at your current bank does not increase your FDIC insurance coverage. This is a key point for individuals or businesses who hold a significant amount of cash, and holding significant cash is not uncommon especially for a business owner who needs available working capital or an individual who is preparing for a large purchase.
Interest Rate Earned: Currently, the available interest rates on competitive 12-month CDs are close to 4% (as of 4/30/2025). While this is a reasonable interest rate on cash balances, the effective rate is often much lower if a portion of the cash balance is not invested in the CD. As discussed above, an individual who has $200,000 of excess cash but only invests $150,000 in the CD in order to keep a $50,000 cushion has effectively reduced their interest rate to 3.10%.
Accordingly, while a CD’s quoted interest rate is often competitive, the effective interest rate earned typically lags behind other options.
Ease of Use: CDs can be easy to set up, but they are difficult to use if the cash is needed prior to the term expiring – specifically due to the early withdrawal penalties.
Key Takeaway:
While a CD can be easy to set up and have a competitive interest rate, there are drawbacks such as penalties for early withdrawals, lower effective interest rates once all cash is considered, and the potential to exceed FDIC insurance limits.
High-yield Savings Account:
The second common option for managing cash balances is to open a high-yield savings account. Let’s consider the same factors used to assess CDs above.
Accessibility/Early Withdrawal Penalties: High-yield savings accounts are generally very accessible. Usually, they are connected to an individual’s checking account and funds can be transferred on short notice. If the high-yield savings account is at the same bank as the individual’s checking account, transfers are often instantaneous.
FDIC Protection: If the high-yield savings account is held at the same bank as the individual’s other accounts, there is a similar FDIC insurance concern. For example, if all the accounts held at that bank are individual accounts (i.e., an individual checking account and an individual savings account), there will not be any additional FDIC insurance provided by opening the high-yield savings account.
However, if the high-yield savings account is held at a separate bank, it will receive additional FDIC insurance coverage which effectively increases the total FDIC insurance available to the account owner.
Interest Rate Earned: A brief Google search will yield many accounts offering competitive interest rates. While some of them may be great, often they represent promotional rates that are intended to gather deposits. After a period of time, banks will lower the rate on these savings accounts knowing that most individuals are not willing to go through the hassle of continuously opening new accounts and transferring funds to maintain competitive rates.
Ease of Use: Those who are willing to go through the effort of opening new accounts each time the interest rate on the savings account declines can achieve a reasonable long-term interest rate; however, the process can be challenging due to the administrative work of setting up accounts, moving funds, and tracking multiple 1099-INTs necessary for tax preparation at year-end.
Typically, individuals eventually settle for a lower average rate to avoid the hassle of continuing to open accounts.
So, the questions is… Is there a better solution for managing cash balances that is easy, streamlined, and puts more cash in your pocket?
The answer is Yes!
Key Takeaway:
High-yield savings accounts can provide easy access to funds and competitive interest rates; however, attractive rates are often part of a promotion to gather deposits may drop after a few months.
Flourish Cash:
Flourish Cash is a solution that streamlines the process of managing an individual’s cash balances. Flourish Cash, itself, is not a bank, but it has partnered with a number of banks (currently 24 as of 4/30/2025) and has negotiated attractive depository rates for its customers.
Individuals who utilize Flourish Cash open a brokerage account with Flourish and transfer their cash into the brokerage account. Flourish will then deposit that cash with one or more of the banks they have partnered with.
Because Flourish Cash can negotiate on behalf of many clients and a large number of deposits, they have more leverage in the rates they are able to receive. Accordingly, Flourish Cash is able to offer competitive rates to their customers that are consistent with the best rates available in the market at a given time.
With a large number of partner banks, if one bank chooses to reduce the rate they are paying, Flourish Cash can simply move funds to another partner bank. The individual customer continues to have a single Flourish Cash account and receives one 1099-INT at year end regardless of the number of banks where funds were deposited during the year.
Let’s consider how Flourish Cash stacks up against the criteria for evaluating a cash solution.
Accessibility: Individuals will typically keep their main checking account and simply connect that checking account to their new Flourish Cash account. Funds in a Flourish Cash account can be transferred back to their checking account using a same day transfer if initiated early enough in the day. If the cut-off time is missed, the cash will be transferred the following business day.
Early Withdrawal Penalties: There are no penalties for withdrawing funds from Flourish Cash. The cash is always available, and no minimum balance is required.
FDIC Protection: Flourish Cash itself is not a bank. Accordingly, it is important to understand that the FDIC insurance received does not come through Flourish itself. Rather, the FDIC insurance covers the cash as it is held in the underlying partner banks.
Because FDIC insurance is per bank, Flourish Cash is able to manage the FDIC insurance coverage by spreading the cash out over multiple banks when necessary. With 24 partner banks, an individual Flourish Cash account is eligible for up to $6,000,000 in FDIC insurance coverage, and a joint Flourish Cash account is eligible for up to $12,000,000 in FDIC insurance coverage.
Accordingly, the level of FDIC insurance coverage that Flourish Cash helps its clients maintain by spreading their cash balances across multiple banks is significant.
Interest Rate Earned: Because Flourish Cash has the bargaining power of offering access to significant deposits to partner banks, Flourish is able to negotiate attractive rates for their clients. While the interest rates are variable, they are competitive with the best rates available in the market at a given time. Currently, Flourish Cash is paying 4.0% (as of 4/30/2025) on cash balances.
Ease of Use: Flourish Cash is very easy to use. Once a Flourish Cash account is connected to an individual’s main checking account, transfers back and forth can occur on short notice with no penalties or minimums.
After learning how effective Flourish Cash can be as a simple and streamlined option for cash management, many individuals have a few questions:
Q. How does Flourish Cash make money?
There are no fees for opening a Flourish Cash account. Flourish Cash makes money when they are able to negotiate a higher depository rate than what they pay. For example, if they can negotiate a 4.25% depository rate and pay a 4.00% depository rate, they will make the spread. Ultimately, a well-deserved fee in our opinion.
Q. What kind of accounts can be opened?
Flourish Cash allows clients to open individual accounts, joint accounts, trust accounts, and business accounts. Generally, a Flourish Cash account fulfills the same function as a savings account; so, individuals will keep their primary checking account that they use for regular transactions. Then, they will link that checking account to their Flourish Cash account which will allow them to transfer any excess cash into Flourish Cash until it is needed, allowing them to earn a competitive interest rate in the meantime. Given a Flourish Cash account is readily accessible, the amount of cash held in the checking account is typically minimal allowing most of the cash to earn an attractive interest rate.
Q. How do I open an account?
Flourish Cash accounts can only be opened by contacting a financial advisor who has an established relationship with Flourish Cash. In the case of Prairiewood Wealth Management, we don’t charge any fees to open a Flourish Cash account; so, individuals who are interested can reach out and request a link to open an account.
Once we provide the application link, the process of opening the account is very simple and generally takes 10-20 minutes.
Q. Why hasn’t my current advisor helped me increase the interest earned on my cash balances?
Most financial advisors assist clients with only a small portion of their finances. Often that is limited to their investment accounts or a specific question raised by the client. This is an example and one reason why we believe in the importance of a comprehensive advisor that sees the entire picture. Even to make a recommendation as simple as maximizing the interest earned on cash balances, the advisor needs to understand how much cash the individual is holding, where that cash is located, and what interest rate the various accounts are paying. Most advisors who are focused only on the investment accounts don’t have the information necessary to identify the gap and make this recommendation.
Key Takeaway:
Flourish Cash can be a simple and streamlined option for cash management with same day access to funds, a competitive interest rate, and the ability to maintain high FDIC insurance limits.
Value of Earning Interest on Cash:
While ensuring you maximize your ability to earn interest on cash balances may seem like a basic fundamental of financial planning, it is often overlooked.
A family that holds $200,000 in cash between personal and business accounts at their local bank often earns next to nothing on those balances. With the ability to earn 4.0%, they are willingly forgoing $8,000 per year that they could use to build incredible memories with their children, save for their next big purchase, or set aside for their own retirement.
Cash is a valuable asset that can generate a meaningful return over time. Those who choose to maximize their cash balances will reap that return themselves, and those who do not will continue to pass the earnings along to their banking institutions.
Key Takeaway:
Someone will earn a return on your cash. It will either be you or your bank. Will you take the steps necessary to keep more cash in your pocket?
Conclusion:
As interest rates have risen in the past handful of years, many banks have been slow to increase the interest rates they pay customers on depository accounts. This has fueled substantial revenue for banks as they capture the net interest income spread between what they pay depositors and what they earn lending the funds to customers.
Regardless of the minimal amount of interest earned on checking and savings accounts, most individuals do not shop around for the best interest rates because moving accounts is a hassle.
While there are traditional approaches to achieving better interest rates such as opening a CD or savings account, these solutions have their drawbacks. Individuals who are looking for a way to improve the interest rate received while also establishing a streamlined approach to managing their cash balances should consider an option such as Flourish Cash.
Flourish Cash ensures funds are readily accessible without penalty, manages FDIC insurance coverage, provides competitive interest rates, and streamlines the cash management process.
For individuals interested in learning more about Flourish Cash or our overall approach to comprehensive wealth management, feel free to reach out to us. One of our Family CFOs would love to connect with you and help determine if what we do is right for you.
