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How To Maximize Your Savings with High-Yield Accounts (Don’t Miss Out!)

August 1, 2023

You may not be making as much as you should on your cash! In this Q&A, we discuss the best places to store cash, how to earn attractive yields, and the traps you need to avoid when choosing a high-yield savings account.

Transcript

I am so excited about this because I love free money. I know that you love free money, and while it may not seem like this is free money, I’m gonna argue it is. And if you’re someone out there not getting it, not grabbing and not taking advantage of it, you’re missing out. Hey, I’ve been saying for years, all my financial mutants, we kind of expect our money to grow three to five percent more than anybody else just because we’re good with money. If you’re not maximizing cash, you’re leaving money on the table, and we’ve got proof today. I would argue if you’re not maximizing cash right now, it’s because you’re just lazy. It’s because you are not willing to go that extra mile to be the commander that your army of dollar bills needs you to be.

But Brian, I think a lot of people fall into this trap. We saw an interesting statistic that the status quo for a lot of folks is good enough. Yeah, I think banks take advantage of the fact that there are some friction costs to changing, and there’s a lot of loyalty to banks. This number has actually gone up because I had previously, when we were talking about this in show prep, I said I think there is a stat out there that says bank relationships are like 16 years. But when Megan and Daniel were putting this together, we found that actually, according to bank rate, most Americans have the same bank account for an average of 17 to 18 years. It’s because you know, we get it set up, and we have our accounts linked to it, we have the automatic payments coming out, and oh man, changing it just seems like a nightmare. Why do I want to do that? But there’s a reason that you want to do that. There’s a reason that if you are just being lazy and you’re not taking advantage of it at this point in time, in this moment, there are some real dollars that you’re missing out on.

You may be asking the question, okay, how much am I missing out on? What am I missing out on? Check this out. If you think about the average brick and mortar bank right now, they’re paying about 0.42 percent on their savings accounts across the country. That’s a savings account. Any of you out there sitting on like $30,000, $50,000 in a checking account, you’re actually probably getting zero. But this is a savings account at a brick and mortar bank. So, we said if you have $30,000 sitting at a brick and mortar bank earning 0.42 percent, you’re getting $126 of interest a year. So, that’ll take you out for a nice dinner, maybe, right? Well, if you were to use an online high-yield savings account, now you’re talking about $1,200 in interest. That’s ten times more. And there are even better options out there like money market mutual funds. They could have you bringing in over $1,400 based on the present interest rate. So, if you’re not doing this, if you’re not paying attention to it, you are literally walking away from free money. Yeah, I would think about it in these terms: you could actually get in one month what most brick and mortar banks are paying for an entire year. So, this is why when we’re talking about a tenfold increase, you need to perk up, listen, and we’re gonna actually walk you through it because I think what I was surprised by when we were doing the show prep was that there are a lot of nuances to this that I think most people don’t understand, and we’re going to show you what you should do and what are the parts so you don’t get caught up in the hassle factor of making a lot of actions for not much benefit.

Okay, Brian, so the audience out there is saying, “Okay, I hear you guys. I understand what you’re saying. I understand, but why would I keep cash? I mean, I’m an investor, I’m a financial mutant. I want to get my money working for me. What is the reason why I would hold on to cash?” Well, we think there are a number of reasons. The first of which is no surprise, it’s your emergency fund. If you’re following the financial order of operations, Brian, you have a thing that you can hold off to show up. Oh yeah, here we go, if you’re following the financial order of operations and if you want to get a free copy, go to moneyguide.com/resources. When you get to Step Four, that is your Emergency Reserve bucket. That is your rainy day fund that is going to keep your life out of the ditch. So, at a very minimum, you ought to be holding cash so that you have it there for emergencies. Yeah, any upcoming purchases, you know, people ask me all the time, “I have a house down payment where I think I’m gonna be buying a house in the next 18 to 36 months, or I’ve got a trip, or even an engagement ring.” I’m always amazed at people thinking about if they’re popping the question in the next 18 to 36 months and they’re like, “Should I put it in the market?” I’m like, “No, no way. You need to put it in cash equivalents.” And we’re going to walk you through how to maximize that.

And then I do cover, and we’re not going to spend a ton of time on this today, but I do love if you want to be a baby Buffett. Step eight, once you get to step out of the financial order of operations, is something I’ve already covered. There are actually opportunities to build wealth with cash as well. Yep. And so, if you are sitting there thinking, “Yeah, but man, guys, I’m a financial mutant. I’ve already said this, I’m gonna do all these things, but I want my money to be working even harder.” One thing that we would remind you of is for these types of purchases, for emergency funds, for purchases inside of the next five years, for having powder money, you want to make sure that it actually stays in liquid, readily available cash. Because when bad things happen, they don’t often happen in isolation. Yeah, when it rains, it pours, guys. You’ve heard me talk about how bad news, volatility, unemployment, real estate getting crushed, they’re all extroverts. They all like to hang on the street corner smoking cigarettes together. So, you need to pay attention. When it rains, it pours. Bad news typically doesn’t happen in isolation.

And just to show you a very quick snapshot of this, look at unemployment rates from 1996 until now. You can see there’s kind of ebbs and flows. Unemployment comes down, and then it goes back up, and then it comes back down, and it goes back up. Well, if you were to lay over here the bear market, you look at the 2002 dot-com bubble burst, the market at that time was down 49%, unemployment was at six percent. So, you get laid off and the time you need to access those dollars if you have them invested, the market just delivered a painful number for returns. In March 9th of 2009, the market was down 57%, unemployment was eight and a half. And then obviously, one that we all remember is COVID in March of 2020, the market was down 34% and unemployment skyrocketed to 13%. So, you want to make sure that when you need those dollars, they are there readily available for you to utilize in an emergency.

And also, another point with this, when it rains, it pours. There are a lot of people, I fell in this trap. You guys have heard me. I had my promise and prayer to if I got through this moment of the Great Recession where I was relying on my home equity line for my cash. I was running so thin on cash because I was like, “Why do I need it? I have six figures that the bank is allowing me to have a checkbook as well as a debit card, too. So, I can just borrow off of my home equity line at Prime minus.” I think I had a Prime minus a half, maybe Prime minus three quarters. It was amazing, a great deal that made it almost pretty low access costs as well. But guess what, it was all a mirage because when it rains, it pours. The bank said, “Just kidding. You have all that access to cash you thought you had. We’re taking it all away because the stock market’s down, your house isn’t worth what we previously told you.” Guys, be very careful because guess what, I saw an echo and I was like, “Oh no, here we go again.” You think history does repeat itself. Because both show them the headline from the next slide. Bloomberg just came out with a headline in the last few days: “U.S homeowners are tapping nine trillion dollars in real estate.” And here’s what I thought was a pull quote out of here, “In 2022, annual HELOC originations rose 34% from the prior year to 1.4 million individual loans. That’s the highest since 2008.” Since the last since the time that you fell into that, I was having those prayers now realize that, Mom, was like, because it takes a few years for the stuff to work through. So, 2009, 2010 is about the time I had my blow-up moment. So, guys, just be careful because all that access to cash and you think you’re being so smart and you being a fine intermediate, and that’s it. It’s not. You’ve got to have cash in your account. And that’s our goal today, to tell you, okay, if you guys have convinced me cash is important, how do we maximize this? Because you’ve already told me checking accounts at your local bank, they’re probably paying practically nothing. Your savings account at your local bank, they’re taking your 17-year relationship for granted and paying you less than a half percent. When there is such a better way that you can get tenfold that return on your cash. And look, cash has been trashed for a long time. We have been begging for rates to get to where they are now. So now that they are at this point, you should take advantage of them. So let’s go right into what you’re talking about, Brian. Talk about the different types of cash accounts available. You know, a lot of people might not realize this, but there are a number of different vehicles that you can use for your cash savings. And the first of which, we’re going to skip above checking accounts, right? We’re going to assume you know that you need to have a special type of account to park it in. The first is just the high-yield savings account. This is probably the most common, the easiest to set up, and probably the one that we’re all the most familiar with. Yeah, because this one is going to have all the protections and everything. This is just a step above your savings account, but it can actually have a great return for your long-term self. So let’s talk about some of the metrics. Generally speaking, when you have a high-yield savings account, you can set it up with a bank or a credit union. You can also make sure that your deposits at these institutions are insured, either by the FDIC if you’re at the bank or through the NCUA, which is a credit union association. You want to make sure that if you’re holding money in a high-yield savings account, it is secured by those insurance amounts to make sure that you stay protected. From a liquidity level, these assets are very, very liquid. You can get to them quickly and easily. A lot of times, you can either access them directly or you can move them back and forth between your checking account as needed. They have a moderate adjustment speed when you think about how quickly the rates adjust. We’ll talk more about that in a second, and they are remarkably easy to set up. A lot of these can be set up in as little as 10 or 15 minutes, either by going into your bank or by doing it online to get your account established.

Now here’s the first kind of nuanced thing we’ll talk about. I’m sure your local bank, your brick and mortar, is going to tell you they have a high-yield savings account. But where we’re going to focus our attention is a lot of these online banks. If you think about the Allies, Marcus, and some of the others, you just go because we’ll cover in a minute, you can go to bank rate. They’ll usually rate the banks every month. But before you just choose the top of the list, hang in there because we have some tips about teaser rates and other things. But guys, you need to understand the reason we love online savings accounts is because they do give you a better rate of return. That’s right. They are a very attractive yielder, and they tend to move pretty well with interest rates. I mean, obviously, we’ve been in this rising rate environment over the last two years. Well, one of the things that we’ve seen is that the returns we’re receiving on our cash has moved along with that. If you look at this illustration, this actually shows the rate adjustment speed from October of 21 all the way through July of 2023. You can see the high-yield savings account, and we’re just using Ally as our proxy here. You can see what the rate it was paying back in 21 relative to the federal funds rate. And then as the federal funds rate has increased, you can see that it’s done a pretty decent job of keeping up with the increases. So, as rates get higher, you as the investor, you as the cash holder, get paid more. A lot of times, the brick and mortar institutions won’t do that. They’re going to be slower to pay you these higher rates. So, you want to make sure that you are an active consumer seeking out accounts that will reward you for taking advantage of their services.

By the way, I want you guys out there to know that you are actually benefiting from my craziness. And what I mean by that is if you actually go try to pull historical rates at, you know, between high-yield savings accounts, money market mutual funds, it’s hard to find. You cannot find that information. But I am crazy enough that I have money in all these different places. Megan and I actually sat down and went through my own account statements to pull this up. And what I found interesting, but now we’re getting five percent or close to it. I know just yesterday because we had a rate increase here in July, Ally has gone to four and a quarter percent. But what people don’t remember because we have short attention spans, short memories, when the FED funds rate was sitting very close to zero, the only place you could get yield really was in these high-yield savings accounts. And they were paying half a percent, and we were so happy about it. Happy for the half a percent because it was better than the 0.01 at your brokerage account, the zero that your checking account was doing. This was something. But now that we have actually seen the funds rate go over five percent, this is the time to wake up, guys. Wake up and start maximizing what you can do.

So, we have high-yield savings accounts. There’s another type of cash account, kind of like a kissing cousin. It’s very, very similar, and these are just called money market accounts. They’re almost identical to high-yield savings. The big difference is how you access the money. Oftentimes, with a high-yield savings account, you’ll have to move money back and forth to your checking. With a money market account, you may actually have a checkbook associated with it or a debit card. And with money market accounts, they’re more likely to have specific account minimums or limit the number of transfers you can do, or they might not have quite as competitive rates. Very, very similar, though. So, you should know, do I have a money market account, or am I taking advantage of a high-yield savings account, a kissing cousin, but it is, I don’t want to hang on to this point too much, but these are very similar. What I typically see is that they might restrict how much you can put money in or take it out, and they might give you a little bit higher rate, but very similar to the high-yield savings account.

But I think it’s important because I’ve been waiting for the opportunity, let’s bring in money market mutual funds. They’re not specifically as safe because they don’t have the FDIC, but they have their own level of protections. Let’s walk them through the difference between, because it can get confusing. The language sounds so, so more. Money market accounts, money market mutual funds. Walk them through the compare and contrast on this. Yeah, it’s a little bit different. Money market mutual funds are exactly what they sound like. They are actual mutual funds that invest in cash or cash-like instruments. So, while your money market account or your high-yield savings account might exist in a bank or credit union, generally speaking, a money market mutual fund will have to be held inside of a brokerage account at a large brokerage institution. Brian, you already mentioned that money markets or high-yield savings or their FDIC insured or NCUA insured. Money market mutual funds are actually covered under a different type of insurance, the SIPC insurance, which covers securities as opposed to cash accounts. It’s a little bit different, something to make sure you’re aware of.

From a liquidity standpoint, these are also very high liquidity, meaning if you put money into a money market mutual fund today, you can get that money out tomorrow. There are no penalties, no restrictions to doing that, and the rates adjust on these very, very quickly. It’s one of the reasons right now we think that money market mutual funds are perhaps even a little more attractive than money market accounts or high-yield savings accounts. And the easiest setup, we’ve said it’s moderate, it might not be quite as easy as opening a high-yield savings account or opening an account with a bank you already have a relationship with because generally speaking, you do have to have access to a brokerage account. You have to open a specific investment account, even though what you’re planning on holding in there may be cash or cash instruments.

So, the things I want to focus on are the two things: liquidity and then the rate adjustment. The first thing, liquidity. The thing you have to worry about with money market mutual funds is the whole “breaking the buck” because whenever you’ve got a money market mutual fund, they hold the net asset value right at a dollar. There have been a few times in history, I think about 1994 and I think about Lehman Brothers in the 2008 collapse, there are moments where breaking the buck does become a risk. Now, the good news is because I don’t want to scare everybody and you’re thinking that this is an access to cash problem, with the FED funds rate being over five percent, the majority of these money market mutual funds now are treasury bills. That’s why liquidity is high, but I want to make sure we give a full education on how these work.

But here’s why this is valuable and you alluded to this, Bo. The rate adjustment is very high on this, and while we’re in a high-interest rate environment right now, or a fast-moving interest rate environment, that can be very valuable. Yeah, if you look at this again, we’re showing this rates increasing from October of 21 all the way through July of 23. As we’ve been in this rising rate environment, you can see that money market mutual funds, and again, we’re just using Fidelity cash reserves as our proxy here, have stayed very, very close to the federal funds increase. So, every time the FED comes out and raises rates, it’s not uncommon for us as money market mutual fund holders to see, “Oh wow, the yield, the seven-day yield on my fund actually increased.”

So, if you want to think about how these compare, you can look at how a high-yield savings account like an Ally account compares to the federal funds rate and how that compares to a money market mutual fund. And as we’ve been in this rapidly rising rate environment, the money market mutual funds, in our opinion, have been some of the most attractive. Right now at Fidelity, you can go get yields at around 4.7 to 4.8 percent, or for larger balances, if you carry over a hundred thousand dollars of cash, you can actually get above five percent in yield right now in money market mutual funds. And they still have protections in place. It’s not FDIC insurance; it’s SIPC insurance. So, you want to make sure you understand the differences there. But man, five percent on your cash is amazing.

Yeah, I think about it. If you want, let’s talk about hassle factor and coordination here. As you can see, let’s go back to 2020 and 2021. That’s on the far left here. The best game in town was the high-yield savings accounts because they were paying half a percent, like an Ally. But I like I said, these are my different account statements. Fidelity was only paying 0.01 percent. So, what I want to warn everybody of is that while we’re in a rising interest rate environment, without a doubt money market mutual funds are awesome. But I do foresee there will be a moment in the future when the FED starts cutting rates again. You will see immediately all these money market mutual funds will also start cutting just as fast as the FED does. So, there could get to a crossover point that as they’re cutting rates, the high-yield savings account will not adjust as fast, and it might, I’ll just say likely, become once again the higher performing option.

Now we’re not suggesting that what you ought to do is like move money back and forth, back and forth, back and forth, you know, snip, snap, snip, snap. That’s not what you should ever do. You should recognize what kind of rate environment are we in. And so, it might make sense that if you do have a high-yield savings account, you don’t close it down. Maybe you leave it open, maybe at least on a small sum there, and you can actually link that to your brokerage account so that depending on where we are in the rate environment, you can just move money freely back and forth to take advantage of this.

And you make a good point. Look, I don’t want, like I said, hassle factor. If you’re running a typical emergency reserve of twenty-five thousand dollars or something, then I don’t think that the hassle factor means you should be chasing the hottest and highest rate because we’re talking about four to four and a quarter percent versus 4.75 to 5. So, there’s about a 75 basis point or 0.75 percent spread here. However, if you are a business owner and you’re running payroll, I’m talking about big payroll and other things where we’re talking about keeping cash in six-figure status, you better pay attention because I mean that’s the big part that if you are in charge or you run large cash reserves, this 75 basis points can be thousands upon thousands of dollars. Don’t waste the moment. Alright, bro, let’s talk about two other types of cash holders. So, be remiss if we didn’t mention these. The first is a little bit more of an old school solution: certificates of deposit. Most of us heard of these when we were growing up. You know, it’s this thing where I can go put my money into a certificate of deposit and I’ll get some sort of return on that. And there are generally two types. There are traditional CDs that are offered by banks or credit unions, and then there are brokered CDs you can actually buy through an investment account. And they are either going to be covered under FDIC or NCUA, or potentially if it’s a brokered CD, it might also be covered under SIPC. The liquidity level is not as high in these. When you put your money into CDs, you are kind of tying it up for a certain period of time. If you buy a one-year CD or a two-year CD or a five-year CD, you’re sort of making a commitment that you’re not going to need the funds in that period of time. So, CDs might not be a perfect solution for your emergency fund. In terms of rate adjustment speed, they generally adjust pretty quickly; however, you are locked in. So, while new issues may be at higher rates, if you bought a CD today and then rates went up six months from now, your CD would not increase. It’s just new CDs that you might buy. So that’s why a lot of people look at trying to ladder CDs, but even that might not be the most wonderful solution right now.

Well, I think a lot of people, because you’ve heard the FED is hopefully getting close to the top of where we’re going with rates. So a lot of forward-thinking people are saying, “We know what? I’ll walk in because I remember back in the early 80s where if you hear people joking about, they locked in like a 10% CD for a period of time.” But we’re in an inverted yield curve period. So what that means is that interest rates are actually higher for short-term assets than they are for long-term assets. You’ll quickly see super uncomfortable. Yeah, that’s not necessarily a great thing because it’s a predictor of recessions and other things. It’s a unique thing, but here’s what I’ll tell you. If you go out to five years, you’ll quickly see that the CD rate is four and a half percent, whereas the CD rate right now for one year is like five and a quarter, maybe even a little higher than that. So, this is not something that you can go lock in and say, “Hey, my safe withdrawal rate is five percent, so why don’t I go lock this in for the next 15 years?” It doesn’t work that way because of the inverted yield curve. They actually adjust the rates down the longer you go out. So just be aware of that. But it is something that if you know you don’t need money and you want to get a little extra juice on the performance, it’s not the worst thing. And by the way, they’ve also made it easier. A lot of brokerage accounts now allow you to create ladders very easily. So you don’t have to do like my grandfather where he drove all over town, every bank in town, opening up teaser rates or CDs at all these different accounts. You can actually, in a brokerage account, buy and hold each because you’re buying actual bank assets. They’re FDIC insured, but with the additional protection just in case the brokerage company ever defaulted. Yep.

Alright, so let’s talk about the last one right now. This one, again, we’re gonna mention it because for a moment, this type of cash holding was the bell of the ball. It was super high headline stuff, and these are I bonds. It’s these things that adjust with inflation to protect you in an inflationary environment. Again, whereas some of the other cash products we talked about are issued by banks or credit unions, these are actually issued by the US government. And the safety is they’re federally backed. They’re backed by the full faith and credit of the US government. So, they are secure; however, they are not incredibly liquid. When you go to buy I bonds, you are making a time commitment that you’re going to hold on to it. Sort of in two frames, the rate adjustment speed is based on inflation, so it’s less tied to the federal funds rate and more tied to the inflationary environment. And the difficulty of setup, we’ve said moderate; that’s being kind because the only way that you can get these, you have to go open them up at the federal website, TreasuryDirect.gov. And it’s, I would say, it’s not my favorite website. It’s also limited. I mean, these were limited to ten thousand dollars, and they had restrictions, you know, one year to five years, you know, on your access to it. And everybody, if you’ve played around with TreasuryDirect.gov, it’s not the easiest website to navigate. So, that’s what the hassle factor on this wasn’t worth it because if you think about rates came to five percent, everybody lost their mind when they were over nine percent for a small moment in time. You have to ask yourself, was that 400 squeeze of the fruit to now have this additional account? Now, for a lot of people, the answer is yes. I mean, nine percent is still legit. But you can see now it’s below five percent, it’s in the fours. So, it was a moment in time, really.

So, we’re suggesting that you should hold cash somewhere. Now, where you choose depends on you. It depends on your preferences, depends on how you use your cash, it depends on the benefits that you’re looking for. But there are a plethora of options for you out there to get your money working for you. But we do want to say, as you think about this, what types of accounts to open, where you’re going to hold your accounts, there are some pitfalls we want to make you aware of. First, make sure that if you’re going to hold a savings account or a money market account, that it is insured, whether you have the FDIC, NCUA, or the SIPC insurance. And you can actually go to the websites and check that out; you don’t have to just take their word for it. Make sure that if you’re going to use the online savings account that maybe you’ve never heard of before, you go to the FDIC’s website to make sure that you see that bank listed there so you’re not getting bait and switch. Yeah, teaser rates. I mean, we’ve kind of, I want to make sure we keep this moving, but Bo, this is something you have had a lot of discussion about, yeah, because I did it wrong. You go to Bankrate.com, and you will see some banks at the top of the rate list, the yield list that you’ve never heard of. They might be playing the teaser rate game. And like Bo and I have talked about this a great deal in other podcast shows, is that what will happen is you go open this account, you get that teaser rate, but you’re going to notice over time they all of a sudden start dropping the rate significantly. I’ll go ahead and say because one that I, it’s a big bank that I’ve actually dealt with, Capital One, is notorious for this in some ways because they come up with new products that they rebrand as a different money market mutual fund that you have to go open. I mean, a money market account that you have to go open up or a high-yield savings account and if you’re in the old one that used to be the top performer, you’re just kind of left and you have to physically call them or go online and transition to the higher one. They don’t just give you and take advantage, you know that you’re their ungrateful service provider in that aspect. Be careful of the teaser rate because it is a true game, because banks use this to harvest assets and then take you for granted and really mistreat you. Well, that’s why I would tie into an institution that keeps you top of the game no matter what’s going on with interest rates, so you don’t get stuck. And don’t forget to know: are there account minimums, are there fees that I’m paying, are there transfer limitations that I can have? You just want to go into it with eyes wide open so you know what you’re getting.

In addition to making sure you’re aware of these pitfalls, you also want to think about some of these other things. Do I want to have everything in one place, or am I okay with having money in a bunch of different institutions? Do I want to walk into a brick and mortar to see a human being, or am I completely okay with virtual? If I need access to cash, do I go to the ATM? Do I want a really good mobile app? Or maybe do I want a provider that allows me to have different savings buckets, where I know that this is my car fund, and this is my home improvement fund, and this is my fill-in-the-blank fund? These are all things to consider when you figure out what kind of high-yield savings account or high-yield cash account might make sense for you.

Yeah, so go do your research, guys. This is an important time, don’t take it for granted. You know, go to Bankrate.com, check out those different rates. And then, this is the time also, guys, don’t get greedy. I want to encourage you to keep it simple, make sure you are making a partner, because remember those relationships last 17 to 18 years. So, measure twice, cut once, and do it right the first time. The biggest takeaway, guys, is as you’re going out to MoneyGuy.com/resources, take advantage of all of our free stuff. We just want to make sure you know there’s a better way to do money. I’m your host, Brian Preston, Money Guy team out. So, the reason I did that, this was not a Q&A show, there’s no way that’s accumulation because I mean look at, we did it, we did that as fast as we possibly could. We ought to tell the team if we just, in case y’all want options.

But we can get back to the team. Consider this your notification that you now have one as well. It’s also a great setup, Rebie’s not here, so we needed somebody to come off out of the wings and help us out on kicking this off, and Bo, I couldn’t help as a proud papa to say, you know, this is the last week that we have an intern here for the Money Guy Show. Why not put them on the hot seat and let them ask us the very first question? I love it. So, if this is your first time hanging out with us, you know that we love putting together content, we love being able to answer your questions, so we have the team out there collecting your questions so that we can lean into the things that you care the most about. So, with that, intern Avery, I am gonna throw it to you to load us up. All right, thank you. CB asks, “My parents want to start putting my name on their bank accounts as they’re getting older. I know this isn’t the best decision. What should they do as I can manage their finances if they can’t?”

Oh, wow, brunch. So I gotta, you know, it’s no coincidence here, she’s saying, “I’ve got aging parents,” and that is this, you know, is this like, “What does I have a friend?” type deals, yes, a planted question so that she could ask me, because this is what we’re doing. We walk around and strap people to our accounts. But this is, let me tell you guys, if you want to get us fired up, this is one of those things that I see people do as their parents start getting older. They just start putting their kids on accounts. They put them on the deeds of houses, they put them on their bank accounts, and I’m telling you, do not do this. Stop. Do not pass go, because here’s the problem you might be creating for yourself and your family. Your aging parents might be creating a gift tax trap. A lot of people don’t realize, you know, you’re only allowed to give seventeen thousand dollars a year without reporting it. Once you go beyond that seventeen thousand dollars to an individual, you’re supposed to be filing a gift tax return, Form 709. And now, realize, each person in the family, so if you have two spouses, they each get to do seventeen thousand to individuals. But this is something that I see a lot of people run afoul and they don’t realize they’ve done it. Because you know, it’s not uncommon that you’ve had an older person that’s been collecting Social Security, has savings, so these accounts might be forty, fifty, sixty thousand, and they just go strap their child on there. You just created a gift tax problem. There’s a better way, and what I’ve found is banks have modernized, Bo, um, you can do payable on death if you don’t want to run through your estate documents. If you live in a state that has high probate costs, you can go to your bank and just add a payable on death. And if you want to have access, there’s nothing wrong with seeing if your bank account can actually grant access to your account through like a power of attorney. You could do a revocable trust. A lot of states that do have probate issues, you can set up a revocable trust, and then you can set up your children or whoever’s going to be helping you out with that part. There are so many options, but do not do what you think is the simple solution, but create great complication for your family. Yeah, I’ll tell you one thing that really breaks my heart when I see this. Not only do you run into the gift tax consequences, but one of the things that might happen when you start just adding children onto real estate deeds or onto investment accounts. You may be taking away one of the most valuable tax planning strategies that exist. Do you realize that when you pass away and when you leave assets to a child, that child gets what’s called a step-up in basis on those assets? If you bought a house for a hundred thousand dollars and now it’s worth a hundred and fifty thousand dollars, no, say a million. Because there are people out in California who bought houses for sixty to a hundred thousand dollars now worth well over, maybe even two million. And if they did this, it would be a disaster. That’s right, because what happens is when you pass away, on the date of death, the basis, the amount that the government considered was paid for that house, gets stepped up to fair market value. So, again, in this situation, if your parents bought a fifty thousand dollar house that’s now worth a million and you inherit that million-dollar house, all of that capital gain goes away, it essentially evaporates. Well, this is true for real estate purchases, it’s also true for brokerage accounts. So, if your parents think they’re doing a good thing by putting you on their accounts, what they’re actually doing is making a gift where their basis carries over to you, instead of letting you inherit this. So, one of the best ways you can protect against this is just simply education, understanding, “Okay, Mom, Dad, what is it you’re trying to accomplish? Okay, great, if you want me to be able to help you with your accounts and you want me to be able to help make decisions, I can have a power of attorney and I can help do those sorts of things, but we don’t necessarily want it to be in my name. Because if it’s in my name, there’s a good chance we could lose some very real tax benefits when we do that.” Yeah, remember how I said when you’re successful, complication will track you down, and that’s when you might need to take the relationship to the next level. This is a perfect gateway because this stuff gets intricate. You also got wishes, you got unique relationships, it’s nice to have somebody in there to help you navigate those tougher decisions. So definitely consider fulfilling the abundance cycle, take the relationship to the next level.

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