Use your money to make you money

Unless you’ve been living under a rock for the past year, you know that interest rates have been on the rise. In fact, as I write this they’re at the highest levels we have seen within the last decade.

But what does this mean for you, and how can you use it to your advantage?

Here's the move

Typically, banks (being the greedy bastards they are) don’t like to pay you for your business. Rather, it’s quite the opposite. They often make you pay them to use their services by requiring minimum balance thresholds and charging monthly fees and overdraft penalties.

Well, because interest rates are so high right now, you can actually get a decent return on your capital if you place it in the right type of account. But the key word there is right type of account. You can’t just let it sit in your plain jane savings account because you’re only going to see a 0.01% interest rate.

Lucky for you though, I’ve stumbled upon an offer that’s too good not to share which is the cause for taking the time to write this article today.

So what's the offer?

Good question. The offer that I’m so excited to share with you is from Robinhood.

Right now, they’re offering 4.15% APY on uninvested cash to Robinhood Gold members.

Is this a good deal?

Yet again, good question. Because, unfortunately, the answer isn’t a clean cut one and determining if this is a good deal or not is going to depend on your unique circumstances.

Specifically, we have to consider the following variables to make a decision:

How much capital do we have to invest?
How long do we plan to let it work for us?
How much additional are we going to invest monthly?
And, what fees are associated with the offer?

In order to help up in our decision, I’ve created a financial model to help.

You can copy the financial model by clicking this link and manipulating the variables directly.

However, I’ve taken the time to compile a few examples below that will highlight when this would be a good deal for someone and when this would be a bad deal for someone.

Bad deal: $1,420 invested over 1 year with no additional contributions per period

Takeaways:

After a one year period, our $1,420 has grown to $1,480.06, but we’ve incurred $60 in account fees for a total return of a measly $0.06
This means we’ve effectively made no return on our money.
Note: $1,420 is the threshold for an annual zero percent yield; meaning, anything less will be a negative yield and anything higher a positive yield.

Fair deal: $100 invested over 1 year with $5 additional contributions per period

Takeaways:

After a one year period, our $100 initial investment with $5 per month additional contributions has grown to a value of $165.38, but we’ve incurred $60 in account fees for a total gain of $5.38
By contributing an additional $5 each month into this account, we have ensured a positive total real return.

Good deal: $7,500 invested over 1 year with $0 additional contributions

Takeaways:

After a one year period, our $7,500 initial investment with no additional contributions per month has grown to a value of $7,817.24, but we’ve incurred $60 in account fees for a total real return of $257.24
By adequately funding the account, we were able to negate the monthly service charge and achieve an adequate return on our investment.

Summary

Robinhood Gold’s offer of 4.15% APY is a good deal for those that have more than $7,500 to contribute to the account at opening; a fair deal for those that have $5 to allocate toward the account each month (no matter what the starting account balance is) and a very poor deal for those that have $1,420 or less to provide as funding at account initialization.

My recommendation

For those that do have $7,500 or more to provide at account opening, this is a wonderful offer. You’ll gain enough interest on your money to offset the cost of the account while still obtaining a return larger than that available elsewhere in the marketplace. You also get to avoid account transfer limits between banks with this offer because Robinhood isn’t a bank. So your money is much more liquid in its movement.

However, if you have less than $7,500 to provide at account opening, you’re better off taking advantage of other offers available to investors to earn interest on their idle cash. In fact, Capital One has a 360 Performance Savings account offering 3.4% APY with no fees or account minimums; which is why I previously highlighted the $7,500 investment as an example earlier, as anything less than that capital contribution results in a yield lower than what Capital One offers.