How Do Interest Rates Work
The Wealthfront Team September 06, 2019
Whether you *think* you completely understand what interest rates are and how they work, or you know that you definitely don’t know everything about them, this will lay out all the essential details.
Note: As of December 16, 2022, the Wealthfront Cash Account has a 3.80% APY. Read more about it here.
While interest can feel like a dirty word for anyone with debt, theres a lot more going on with these rates than the way they puff up the balance on your credit card. Since interest rates will invariably appear in nearly every aspect of your financial life, its incredibly important to understand the different types of interest and their implications on your financial plans. An interest rate has bearing on the size of your credit card bill, how long it takes you to pay off your mortgage or student loans and its also what fuels your savings.
You probably already know a few things about interest rates, like that the principal balance of a loan is the amount you borrowed, and the interest is the money you pay on top of that every month as a fee for borrowing said money. Whats harder to determine is where interest rates come from , how they work, and how they impact your money. Lets dig into everything you need to know to speak interest rates fluently.
Most Banks Dont Share What They Earn On Your Deposits
To understand why many banks could pay you more interest, you need to understand how they make money. Consumer-focused banks use your deposits to make loansmeaning that their profits are largely determined by the interest earned on the loans they offer to consumers. Commonly, these loans are home equity lines of credit, sometimes called HELOCs. A banks profit is the interest it earns on those loans minus the interest it pays on deposit accounts. Profit margins grow when the interest rate charged on loans goes up faster than the interest rate paid on deposits.
The chart below shows an example of this phenomenon at work in 2022 so far. The purple bars, which have been trending up this year, show average HELOC rates each month since the start of this year. The pale yellow bars which remain close to flat but also trend up slightly, show average savings account rates each month over the same time period. The gap between the height of the purple and pale yellow bars shows profit margin, which is obviously widening. In other words, many banks are increasing the interest rate they charge you to borrow while declining to pay you more for your deposits.
The takeaway: not only does the Wealthfront Cash Account currently have one of the highest APYs on the marketit also has a proven track record of passing along a large portion of every federal funds rate increase since the accounts inception in 2019.
How To Withdraw Money From A Wealthfront Cash Account
You can withdraw money from your Wealthfront Cash Account in several ways. For online transfers, log in and select Transfer Funds at the top left of your screen. The site will prompt you to enter how much you want to withdraw and where you want to send it. Withdrawals typically take one to three business days to complete.
With the Cash Account debit card, you have access to a nationwide network of 19,000 fee-free ATMs. You can withdraw up to $1,000 each day this way. Or, you can receive up to $2,500 cash back at point-of-sale terminals if the merchant offers this option.
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Why Interest Rates On High
When you open a Cash Account at Wealthfront, your money is stored at one of its partner banks. These banks have interest rates that are determined by the federal funds rate, which moves up and down at the behest of the Federal Reserve. Wealthfront passes along the interest rate set by its partner banks to its own clients, so when the federal funds rate fluctuates, so too does the rate on your high-yield account.
As Wealthfront CEO Andy Rachleff explained in a blog post, “the fed funds rate influences nearly every financial institution, and a rate decrease directly impacts consumers. The good news: when the rate goes down, mortgage rates go down. The bad news: high yield savings account rates and Certificate of Deposit rates go down, too. Unfortunately that includes Wealthfront cash accounts as well.”
Across the board, high-yield savings accounts offer better rates than a traditional savings account, usually earning up to 20 times more even as interest rates shift, so you’ve already made progress toward automatically building wealth by keeping your money there.
More Details About Wealthfront’s Ratings
Account minimum: 4 out 5 stars
Some providers require an account minimum the least dollar amount you can open an account with. Wealthfronts minimum is $500 for investment accounts, $1 for cash accounts and $0 for financial planning.
Account management fee: 4 out of 5 stars
Wealthfront charges 0.25% for management, and get a $50 customer bonus for NerdWallet readers. The companys biggest independent competitor, Betterment, also charges 0.25% for its digital service.
If you’re not quite ready to pay for money management, Wealthfront will let you link your bank and retirement accounts to its financial-planning tool, Path, for free. If you decide you want Wealthfront to manage your money for you, you’ll start paying the 0.25% fee.
Investment expense ratios: 5 out of 5 stars
An expense ratio is an annual fee mutual funds, index funds and ETFs charge as a percentage of your investment in the fund. Expense ratios are paid in addition to your asset management fee. If you invest in a mutual fund with a 1% expense ratio for example, youll pay the fund $10 per year for every $1,000 invested.
If high, these fees can significantly drag down your portfolio returns, but the expense ratios of the funds used in Wealthfronts portfolios are low. Wealthfronts ETF expense ratios average 0.08%. Portfolios that include the Wealthfront Risk Parity Fund have an average expense ratio of 0.11%.
Account fees: 5 out of 5 stars
Portfolio mix: 5 out of 5 stars
Accounts supported: 5 out of 5 stars
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Alternatives To Wealthfront Cash Account
Wealthfront Cash is one of the best cash management accounts on the market right now due to its high interest rate and lack of fees. The fact you get a debit card and unlimited external transfers also makes it easier to spend and move your money.
However, there are competitors to Wealthfront that might be superior depending on the features and perks you’re looking for.
|Betterment Checking Review|
Betterment is one of Wealthfront’s main competitors, and it’s another leading robo-advisor that also has excellent ESG portfolios and low fees. The Betterment Cash Reserve account currently pays less interest than Wealthfront Cash. However, Betterment also has a fee-free checking account that lets you earn cash-back rewards.
As for CIT Bank, it offers two excellent high-yield savings accounts and a range of other products, including CDs and a competitive money market account. If you’re looking for flexible accounts to hold your extra cash or emergency fund, CIT Bank has a range of products that are worth considering.
Access To Human Advisors
Wealthfronts customer support is available by phone from 11 a.m. to 8 p.m. Eastern, and typically responds to email within one business day. Team members all have Series 7 licenses, and several hold further designations such as the chartered financial analyst or certified financial planner , the latter of which is a fiduciary tasked with acting in your best interest.
If theres a downside, its that Wealthfront doesnt offer unlimited access to planning from a human advisor. That said, most clients will have absolutely no concerns, and a useful online help center can walk you through the vast majority of issues. For all those non-routine tasks, you do still have the customer support team.
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Robust Cash Management Account
With robo-advisors, its easy to focus on the fact that they manage your investment accounts. But the better ones also add in a cash management account, and the very best make it as fully featured as the best fintech banking apps. Thats the case with Wealthfronts cash management account.
Wealthfronts seems to do it all so much so that you might consider relinquishing your traditional bank account:
- Earn interest on your cash
- Bill pay, check deposit and writing
- Debit card and more than 19,000 no-fee ATMs
- Access to your direct-deposit paycheck up to two days in advance
- No monthly account or overdraft fees
- Unlimited free transfers
Youll also receive FDIC insurance for up to $1 million in cash through Wealthfronts partner banks. Wealthfronts cash management account is tops among robo-advisors.
Wealthfronts cash account integrates well with the investment account, allowing you to transfer money and then have it invested in minutes. You can also set the cash management account to automatically transfer money to the investing account whenever youve built up enough cash . So you can set more of your finances on autopilot.
What Is A Wealthfront Cash Account
If youre not familiar with cash management accounts or how they work, theyre similar to checking accounts but with some important differences. You may consider a Wealthfront cash account if you already have an investment account here but you may be wondering:
- Is Wealthfront safe?
- How does a cash account work?
- What are the pros and cons?
This Wealthfront cash account review offers answers to these questions and more.
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The Wealthfront Cash Account Now Has A 380% Apy
Wealthfront Team December 16, 2022
Today, were excited to announce were raising the APY on the Wealthfront Cash Account from 3.30% to 3.80% APY following the Federal Reserves decision to raise the target range for the federal funds rate . This means your cash will continue to earn over 15x more interest at Wealthfront compared to what it would earn in a regular savings account.
3.80% is currently one of the highest APYs on the market, and you dont have to jump through any hoops to get it. Our APY isnt a promotional rate, so it doesnt come with any requirements like minimum account size, direct deposit, debit card transactions, or subscription fees. The Cash Account has no account fees, and youll get up to $2 million in FDIC insurance through our partner banks 8x what youd get at a traditional bank.
Generous Portfolio Line Of Credit
Another great feature is Wealthfronts portfolio line of credit, which allows you to take a margin loan against a portfolios value, much as you could at a typical brokerage. Youll need at least $25,000 in a taxable individual, joint or trust portfolio to take advantage. You can access up to 30 percent of your accounts value and have the money deposited in one business day.
The rates are surprisingly good based on the federal funds rate plus a markup. If you borrow less than $500,000, youll pay a markup of 3.6 percent. But the rate falls as you borrow more, with the markup declining to 2.35 percent for loans of more than $1 million.
You wont need a credit check or see a hit to your credit score, and youll know in less than a minute. Like a margin loan, you can pay back the line of credit as you see fit, with no fixed repayment schedule. But if the value of your portfolio falls significantly, you may need to repay some of the loan or Wealthfront will liquidate some of your positions, as is typical in the industry.
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What Is The Wealthfront Cash Account
Wealthfront is best known for its robo-advisor service which lets you invest in a variety of portfolios starting with just $500. Wealthfront Cash is a checking account offered by the company. It also offers a borrowing account, but it’s not tied to Wealthfront Cash.
Wealthfront Cash is a hybrid checking account. As of this writing, the account offers an impressive 3.30% APY. This is well ahead of the 0.07% average savings account APY and the pitiful 0.01% you get at the big traditional banks. If you’re looking for somewhere to park your emergency fund or some idle cash, it could be exactly what you’re looking for.
This account offers its checking account through partnerships with several banks. Because the cash is swept to multiple different accounts, it offers up to $2 million FDIC insurance coverage, which is much higher than a typical savings account. And with no fees and its high-interest rate, it’s definitely worth considering.
You can use Wealthfront Cash like a traditional checking account. You can set up a direct deposit and even get your paycheck two days early than at other banks. You can also use it to pay your bills and set up automatic payments.
And if you use a Wealthfront Cash account to invest in a Wealthfront Investment account, your money will be invested within minutes. You don’t have to wait days for your money to clear. Your money can start working for you almost immediately.
How Wealthfront Stacks Up
Wealthfronts cash management account offers an alternative to traditional banking, allowing you to keep your savings, everyday spending and investment accounts in one place. Its cash management account is especially ideal if you already have a Wealthfront investment account. Yet, the interest rate on this account is relatively low.
If youre looking for a higher rate of return, check out the best online banks. Also, the Wealthfront Cash Account doesnt come with check writing privileges, so an interest-bearing or money market account may be a better fit if thats a need.
Also Check: Best Compound Interest Savings Account
Types Of Accounts Wealthfront Offers
You may already know from reading other Wealthfront reviews that there are a variety of accounts you can open, including:
- Individual brokerage accounts
- 401 rollover accounts
- 529 college savings accounts
These accounts are offered through Wealthfronts online investing platform. You can open any of these accounts alongside a Wealthfront cash account or open a cash account by itself.
The Wealthfront cash account is an interest-earning cash account. It includes both checking account and savings account features and is offered by Wealthfront with the help of partner banks.
Since Wealthfront is technically a brokerage and not a bank, you may be wondering: Is Wealthfront safe?
The short answer is yes, as the funds held in a Wealthfront cash account enjoy FDIC protection through partner banks. In fact, you get up to $1 million in FDIC coverage, which is four times the normal coverage limit offered by traditional banks.
Wealthfront Brokerage Ups Cash Account Rate To 257% Apy
Wealthfront Brokerage raised the APY of its cash management account, the FDIC-insured Cash Account, by 6 bps to 2.57% for all balances of $1 and above. This is now the rate leader when compared to online savings and money market accounts. It should be noted that this is not a bank account. Its a cash management account. In this previous blog post I reviewed the question of how this account compares in safety to a standard savings account.
Wealthfront announced this rate increase in its blog post yesterday:
Todays new interest rate marks the third increase since we first launched our Wealthfront Cash Account in February.
When it launched in February, it had a 2.24% APY. So the rate has always been competitive in its short life. How competitive will it stay? One thing Wealthfront admits in this blog post is that they will have to lower the rate if and when the Fed cuts the target federal funds rate:
If the rate is lowered by 0.25%, then we will have to lower the rate for our cash account by the same amount.
In addition to a higher rate, Wealthfront is promoting their Cash Account as having two big advantages over savings accounts at banks:
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Quick Transfers To Invest With Wealthfront
Previously, transfers from Wealthfronts Cash Account took some time to get to your Wealthfront investment account and actually get invested. As of February 2021, Wealthfront has sped this process up.
You can now use money in your Cash Account to invest in your Wealthfront investment account within minutes. Speeding up this process helps you invest your money faster, allowing your money to spend more time invested in the market.
Why Is The Cash Account Apy Going Up
Were increasing our Cash Account APY because the Federal Reserve raised the target range for the federal funds rate, and we believe in sharing that increase with you.
As you probably know, we partner with multiple banks to offer you a Cash Account with a high APY. The APY we offer on the Cash Account is largely determined by the rate we receive from these partner banks for deposits. The rate our partner banks pay us depends on both the effective federal funds rate and how eager the banks are for additional deposits . When the Fed raises the target range for the federal funds rate, the rate we can offer our clients goes up, too. Were delighted we can pass along 100% of this latest increase straight to you.
Youve likely noticed that interest rates have already increased many times this year. Thats because the Fed is raising the target range for the federal funds rate in an attempt to lower inflationor an increase in the prices of goods and serviceswhich has been high for much of 2022.
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