Make the Most of Your Cash and Credit Cards

0:04How to make the most of your cash in a rate-cutting world. And the no-fire, no-hire job market. All that and more on this Saturday Personal Finance Edition of Motley Fool Money.

0:19I'm Robert Brokamp and this week I speak with Motley Fool Money Managing Director Brendan Byrnes about his tips for finding the best savings accounts, CDs, and credit cards as the Federal Reserve begins lowering interest rates. But first, let's talk about what happened last week in money. On Wednesday, payroll processing firm ADP announced that private payroll shrank by a seasonally adjusted$32 ,000 in September, the biggest monthly drop since March of 2023, and a surprise versus economists' expectations for a$45 ,000 gain. August was also sharply revised down from a previously reported$54 ,000 gain to$3 ,000 loss, reinforcing other evidence that the job market is slowing down.

0:59Despite the weakness in the job market, the unemployment rate is still low at 4.3%. This could be happening because the supply of workers is shrinking due to people leaving the workforce and lower immigration. And layoffs are also still low, although that is little solace to the people who do get let go. Experts are calling this a low-fire, low-hire job market. Companies are mostly keeping the workers they have, but not expanding their payrolls. As Nicole Bichaud, the labor economist and zip recruiter, said in a recent interview with TheStreet.com, quote, we're seeing employers pulling back on hiring, slowing down growth in order to cut costs as they're seeing tariffs eat into their bottom lines more and more, and trying to figure out how the changes to all these different policies and macroeconomic conditions are going to continue to impact their business moving forward.

1:46End of quote. Moving on to our second item, these days you can use AI in all kinds of ways, including getting help with your personal finances. But is AI up to the task? That's the question asked in a recent study by Encore Estate Plans, an estate planning software company. The study asked the most popular AI tools 46 common estate planning questions. The top performing LLM was Claude, which earned a grade of A or B on 69 % of the questions asked. slightly more than a third were assessed to be completely correct. Perplexity came in a close second, but ChatGPT performed much worse. Almost half of its answers earned a grade of D or F.

2:27Just speaking from personal experience, I can say that AI tools get a lot of things right when it comes to financial information, but a lot of it is often outdated or just plain inaccurate. So at least for now, I wouldn't replace a financial planner, a state planning attorney, or tax pro with AI. And now for the number of the week, which is 666. And no, it's not because it's Halloween season. As Bloomberg columnist Jonathan Authors pointed out in an article this week, the low for the S &P 500 during the Great Recession was 666, reached on March 6th, 2009. And recently, the S &P 500 surpassed 6 ,666, a tenfold increase.

3:07But that doesn't include dividends and their reinvestment. On a total return basis, the S &P 500 is up 1 ,240 % since March of 2009. One of the most popular ways to invest in the S &P 500 is the SPYder S &P 500 ETF, often called the SPY because its ticker is SPY. And as Ed Yardeni of Yardeni Research pointed out this week, the share price of the SPY recently reached 666. Is it a bad omen? Well, Yardeni thinks that the S &P 500 will end the year at 6800. But as the market hits all-time highs, valuation measures are likewise rising. The cyclically adjusted price-to-earnings ratio, otherwise known as the CAPE, made famous by Nobel Prize-winning economist Robert Schiller, now exceeds 40 for only the second time in history, the only other time being during the dot-com bubble.

3:56The Warren Buffett indicator, which compares the stock market's total value to the U.S. economy's GDP, is over 200%, a level only seen once before in 2021, and a level that Buffett once said is, quote, playing with fire. And it's well above the 150 % level reached during the dot-com peak. So what should you do? Well, perhaps nothing, especially if you have a high risk tolerance and have a timeline that is a decade or more. But if you're a more conservative investor, or maybe you're near or in retirement, it might make sense to do some rebalancing into lower risk assets. Mark Holbert of MarketWatch recently took a look at how a portfolio of 60 % stocks and 40 % bonds has performed historically when the market is at valuation similar to today's.

4:39His conclusion, quote, in the past, when the market was overvalued as it is now, a 60-40 portfolio almost always beat the S &P 500 over the subsequent decade. End of quote. One place to find safety is in higher yielding cash, which is what we'll talk about next when Motley Fool Money continues. Trading as Schwab is now powered by Ameritrade, bringing you an expanding library of education with even more ways to sharpen your trading skills. Access new online courses, insightful webcasts, articles, engaging videos, and more, all curated just for traders. Plus, guided learning paths with content designed to fit your unique interests.

5:19No sifting to find exactly what you need, so you can spend your time learning to trade brilliantly. Learn more at schwab.com slash trading. You're listening to Motley Fool Money, the podcast, but there's another Motley Fool Money. And that is a website found at fool.com forward slash money, and it's dedicated to helping people choose the best bank accounts, brokers, credit cards, loans, and more. The managing director of that Motley Fool Money is Brendan Burns, who joins us today to discuss how a new rate cutting cycle from the Federal Reserve will affect your finances and what you can do about it.

5:53Brendan, welcome to the show. It's great to be here. Thanks for having me. So the Federal Reserve cut rates once in September, suggested that two more may happen this year, maybe another next year. The options market is actually predicting there'll be even more cuts. So presumably, that means rates from all kinds of banking products are going to go down. So what reacts most quickly? And are there types of rates that are maybe a little stickier, takes them a little longer for them to react to the Federal Reserve, if they react at all? Sure. So obviously, I think the stickiest is going to be a CD account that you've already opened, or thinking about opening right now, of course, that's the benefit of CD accounts in that you're locking in that rate.

6:31There are some drawbacks in that you lose flexibility, of course, and when you can withdraw that money, but that is on paper going to be the stickiest. Outside of that, when we talk about things like high yield savings accounts, new CD accounts, those are going to vary in reaction to Fed cuts, but directionally they are going to come down. So a component of them certainly is the Fed funds rate, which has been cut and probably will be more in the future, as you said. But it's not everything. They also, those banks are priced those APYs according to things like competition or internal funding goals.

7:03So in general, you'll see them come down, but maybe not one-to-one and maybe at different timeframes before, during, or after a Fed rate cut. As for things like the cash in your brokerage account, if it's sitting there in a low yield sweep, that'll react more slowly. you should probably move your money out of a low yield sweep but we can talk more about that later if it's more in a money market fund account it'll react pretty quickly things like credit cards helix move pretty quickly as a large portion of them are linked to the prime rate and then you get to things like 30-year mortgages which of course are extremely hard to predict i think a lot of people think oh the fed's cutting interest rates that means mortgage rates are going to come down, right?

7:46And the answer is maybe, but also maybe not. That's because while that can be one piece of the pie, there are a lot of factors that go into 30-year mortgage rates, things like inflation, growth expectations, et cetera. So while it can help, don't just expect that because we had our Fed rate cut, we might have a few more in the future that you're going to get a low refi rate in the future. It could happen, but I wouldn't necessarily bank on it just because there's so many factors there. Yeah, it's only been two weeks since that first cut, but actually mortgage rates have moved up since then. So we'll see what happens.

8:22But generally speaking, we probably should expect rates in general to go down, which is great if you want to borrow money, less great if you're trying to save money. So what are some tips for finding the best high yield savings accounts, CDs and credit cards nowadays? Well, you know, I have to plug the website, fool.com slash money, as you mentioned earlier. I think we have a great, great listing, great great resources of products there. But more generally, let's talk about cash instruments first. You should be earning minimum 3 % right now on your cash, at least in October, 2025. You can earn even more, but I would say that is the minimum amount.

8:57If you're earning less than 3 % on your cash, I think it's time to take action. And so there are a lot of really good high yield savings accounts out there, often around three and a half percent right now, or even higher. One tip here, you may want to look towards a financial institution that has a track record of keeping their APYs high on these accounts. A lot of times what we'll see is some teaser rates come out and they'll offer an above market rate for a couple of months and then they'll slash it and cut it in half or even more. And so if you don't want to have to babysit your account, if you don't want to have to pay attention all the time, consider a very well-established financial institution with a track record of keeping rates high.

9:36I'm talking about like an Amex, a Capital One savings account. Discover has a really good savings account. So that's something to look for. CDs, look for CD rates pretty much across durations that are around 4 % or higher right now. So you can find a CD rate generally, no matter what duration you're looking at, at that rate or higher. And you can kind of create a ladder with different accounts at around 4 % or higher in general, if you'd like. And then credit cards right now, what should you look for? Three big factors. One, what's your credit score? In general, if your credit score is above 670 or so, then you have a pretty good chance of getting approved for some of the better credit cards.

10:13So assuming that's the case, then you want to take a look at one, what do you spend money on? And two, how much effort do you want to put into really accumulating rewards in the credit card space? So if you're someone that wants more of a set it and forget it option, think about a flat rate, 2 % credit card. There's some really good options out there. You don't have to think about it much. if you're a traveler, if you want to put a little bit more effort in, then, you know, look for a card that maybe it has a$95 annual fee if you're a traveler, but you can justify that. Maybe it's even higher and you can justify that based on your spending habits.

10:45Or if you prefer to stick in the cashback space and want to put in maybe a little bit of effort to get even higher rewards than just a flat rate, there are some cards that have rotating categories that can go up to as high as 5%, 6 % that you should investigate. And we have a lot of really good options on our website there too. Credit card rates have come down a bit from their peak a year ago, but the average rate is still above 20%. And if you go back to 2022, the average rate was below 15%. Then the Fed began raising rates, which so some people will blame today's high rates on the Federal Reserve.

11:16But you can go back to periods when the Fed funds rate was at similar levels or even higher. And the average credit card interest rate back then was between 14 and 16%. So why are credit card rates so much higher today? Yeah, you can't blame it all on the Fed. If you look at it at a very high level and somewhat simplifying things, there are really two main things that go into credit card APRs. And that is the prime rate, which certainly the Fed funds rate can affect. It's usually a Fed funds rate plus 3 % for a lot of institutions. And then the other piece of the equation is the margin. And that's the margin that the financial institution needs in order to compensate for the risk that they're taking on with credit card loans.

11:56That's where they get their profit, et cetera. And so what you're calling out is a growth in that margin, right? When it comes above the Fed funds rate even more than you would expect with APRs sitting at high levels. And that margin part of the equation is at historically high levels. So there are a few reasons for that. One, credit card issuers are pricing in more risk and or more profit there. And they have seemed to mostly be able to get away with that and still acquire customers. So maybe customers are a little less sensitive on the APR side these days, and they feel like they can raise that or they feel like they need to raise that to account for risk.

12:32And then there's also a little bit of a dynamic here with regulation. And we have seen some regulation come through that makes it harder to adjust APRs towards certain people on the back end, according to their spending habits, et cetera. And so what that can lead to is a little bit more margin on that APR baked in upfront. And it's another reason you see some of those higher rates. So if you have a higher rate card, of course, you might want to look for one with a lower rate. But besides the rate, you know, I think these days people often choose credit cards based on the rewards they offer. Any interesting trends or developments in the reward space over the past year or so?

13:06Yeah, one of the biggest one is premium credit card. What we'll call the premium credit card wars right now or changes in this space really heating up. These uber elite credit cards from Amex, Chase, Citi just introduced one, etc. But you see higher annual fees to the point where some of these cards are now charging nearly$800, nearly$900 per year just to hold the card, which is crazy. But I will tell you that can make sense for certain people. It is certainly not going to be everyone, but a few things to look for as to whether that might make sense for you. One, you're a frequent traveler. you know you pretty much have to be to to be able to justify the perks there and two with these annual fee increases this year what we're seeing is a lot of the benefits are going more towards credit systems so you know a merchant might give you a 200 credit if you use your credit card and spend money there a 300 credit etc and so there are a lot more of those now and so for someone interested in these cards really take a hard look at which merchants are offering those credits for some people, you might be like, wow, I'm spending money at a lot of these.

14:20I can cover the annual fee just in these credits. And then the travel perks and the benefits are just a cherry on top, but it's going to be very individual to each person. These cards are the ones also that cover things like lounge access, which I know there've been a lot of complaints lately about lounges being overcrowded and them not feeling very premium anymore. I think these higher annual fees are probably going to push more people out of these cards. So maybe it helps a little bit with that lounge access, but I wouldn't expect a massive improvement either way. You have spent years researching and writing about pretty much almost any topic related to personal finances.

14:56So what are some tips, tricks, or maybe misconceptions that you wish more people knew about? I want to start with money market funds because I know this audience is a lot of investors and a lot of people with brokerage accounts. So we were talking about cash management earlier. one of my favorite recommendations is money market funds within your brokerage account. And some of these, you can change your default cash position to a money market fund, or you can just purchase the money market fund within your brokerage. But these are really, tend to be really great tools. One, because they're convenient.

15:27So you have your cash now sitting in your brokerage account. And when you're ready to invest, it's very easy just to move that money and buy stocks, buy index funds, ETFs, et cetera, from your cash position. Two, they tend to have high yields if you choose a really good money market fund. And then one underrated aspect of them is state and local tax breaks if these money market funds have a high percentage of their underlying funds in treasuries, which many of them do. So if you live in a high tax state, say you're in California, New York, et cetera, these can really be meaningful for your cash position and for reducing your state and local tax burden.

16:06You want to look for a money market fund that has a high percentage of treasuries and some other government securities also apply for what you're going to get tax breaks on. That's a really nice benefit of these money market funds. I will say that they are not directly FDIC insured. So take that into account, like high yield savings account CDs tend to be FDIC insured. These are not, but often they do have a lot of their mixes, underlying treasuries or government securities. So, you know, if something goes wrong with those, then we're probably in bigger trouble anyway. Right. And just to distinguish, those are money market funds.

16:38There are money market accounts, which are offered by banks and FDIC insured, but you're not going to get anywhere near the yields on the accounts as you do the funds. That's right. That's a great call out. Another tip for a lot of people, but not everyone, is to avoid debit cards and use credit cards instead. This one comes with a massive caveat, which is if you're not able to control your spending, then debit cards are a great option for that. They're only going to let you spend what you have. So it's not worth going into credit card debt just to get rewards or benefit of credit cards. If you're even slightly on the fence about, can I control my spending, stick with debit cards.

17:15but if you're able to do that and effectively use credit cards like a debit card and pay off your balance each month then credit cards are generally the better way to go for three primary reasons one they're going to offer better fraud protection than debit cards two credit cards are a great way to build and maintain your credit score which has as we know a lot of impacts across your financial life and three rewards you tend to get low rewards or no rewards with debit cards with credit cards, it could be super meaningful, hundreds, even thousands of dollars per year. If you spend a lot of money, if you optimize your credit cards and in a way that can drive that kind of money.

17:52So I know a lot of people use debit cards. It's the mix of using debit cards versus credit cards is roughly the same. It's about 30 % or so on each. And I know some Americans are not going to qualify for some of the better credit cards, but if you can, and if you keep your spending in check, credit cards are the way to go for those reasons. One final one is we talk a lot about optimizing your money via cash accounts, investing, etc. One of the biggest things I think that tends to fly under the radar is people in general should always look to optimize and raise their income too. And so if you're still working, that could mean asking for a raise, trying to figure out how to get paid more.

18:34There was a study that came out a few years ago that said 70 % of people who ask for a raise wind up getting one. I don't know if I'm fully buying that. I didn't look at the methodology, but the point is, it's probably more likely than you think if you're doing a good job at your role. And then your compensation compounds on top of that because you tend to get raises on top of that higher level. So that's something to pay attention to. And if you're retired, you know, things like timing, social security, timing withdrawals, et cetera, that can help with your income as well. Which brings me to my last one, which is a bonus one, somewhat related to what I just said.

19:07Don't be afraid to ask for things. I think a lot of people feel that these financial institutions, there's no negotiating. Everything is set in stone. But I'm here to tell you that's not necessarily the case. Don't be afraid to get on the phone, call up your financial institution. Maybe you're thinking about downgrading your card because it has an annual fee. If you call them, there's a chance that they say, hey, we'll give you a statement credit to offset that. or if you want a lower APR, you could ask for that. If you want a credit limit increase, you can ask for that. If you want to waive some fees, you could ask for that.

19:36It doesn't necessarily mean that they will say yes, but I do think that they will say yes more often than people think because they pay a lot of money to acquire new customers and they would rather try to keep you around than have to go out and to acquire a new one. So that's just one where it could go a long way just by asking for something. And that's something people don't always realize. Well, Brendan, this has been very educational. Thank you for joining us. Thanks for having me. And if you'd like to learn more from Brandon and the rest of the team at the other Motley Fool Money, visit fool.com forward slash money.

20:09Support for the show comes from Fundrise. For the past 70 years, there's been a room in finance most people couldn't enter. A room where you could have invested in some of the biggest names in tech, companies like Airbnb and Uber before their multi-billion dollar IPOs. I'm talking about venture capital. Fundrise recently took a sledgehammer to those closed doors by launching a venture capital product that's available to anyone. Their mission is to give everyone the chance to invest in the best tech and AI companies before they go public. You can visit Fundrise.com slash fool to check out Fundrise's venture portfolio and get in early today.

20:44All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. This is a paid advertisement. It's time to get it done, fools. This week, I'm going to encourage you to follow one of the most boring, but still important pieces of financial advice, and that is to build up an emergency fund that can cover your expenses for at least six months. I'll start with a little story here. You know, when I was in high school, I thought I grew up to be a priest or a helicopter pilot for the Coast Guard. So I applied to the Immaculate Heart of Mary Seminary in Winona, Minnesota, and the U.S.

21:17Coast Guard Academy in Connecticut, getting accepted to both. I decided to attend the former, and while I obviously chose to become a fool instead of a priest, I have often wondered what my life would have been like in the Coast Guard. I figured it would have been a steady job with predictable pay, good benefits, and a pension in retirement. That is, until the age of government shutdowns. Many service members in the Coast Guard are among the federal employees who may not get paid, depending on how long the shutdown lasts. Some employees will be furloughed. During the 2008 to 2009 shutdown, many families of service members had to turn to food pantries.

21:52So the bottom line here is that everyone should be prepared for an unexpected and unpleasant financial surprise. Could be a loss of income, government shutdown, a layoff, an employer that goes under an illness or accident that leaves you unable to earn an income. Or the surprise could come in the form of a big expense, a home repair, a car accident, a hospital bill. Now is a great time to build up the safer side of your personal finances. As I often say, be a long-term optimist, but a short-term pessimist. Hope for the best, but be prepared for worse. And that's the show. As always, people on the program may have interest in the investments they talk about, and The Motley Fool may have formal recommendations for or against.

22:34So don't buy or sell investments based solely on what you hear. All personal finance content follows Motley Fool editorial guidelines, and it's not approved by advertisers. Advertisements our sponsored content and are provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. I'm Robert Brokamp. Fool on everybody.