Date: 2019-11-01 22:00:01
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Let’s talk about the recent change to Robinhood Cash Management Account, Lower Interest Rates, and what this means for you – enjoy! Add me on Instagram: GPStephan
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We’re writing to let you know that effective today, the Cash Management interest rate has been adjusted to 1.80% from 2.05% Annual Percentage Yield (APY)
Now, to be honest…this is something I felt we could see coming, and it NOT just Robinhood that’s affected by this…EVERY SINGLE one of your savings accounts will be making interest rate adjustments over the coming days, and you’re going to see a decrease in what your cash is earning.
First, Interest rates paid by savings accounts are NOT fixed, and will fluctuate over time…for better, or for worse.
Here’s how that works, in very simplistic terms: Banks want you to deposit money with them so they can turn around, and use that money to invest elsewhere. The bank makes a profit on the spread between the return on investment they receive, and what they pay YOU as interest…
Now in terms of how much a bank can actually make by “INVESTING YOUR MONEY,” this amount is largely influenced by what’s called: THE FEDERAL FUNDS RATE. This is basically the interest rate that BANKS pay any time they borrow money from the Federal Reserve. So, in a sense, the Federal Reserve is almost like a Bank…for the Banks.
This is important because this Federal Funds Rate impacts what’s known as the Treasury Yield, which is the amount of interest the GOVERNMENT will pay you for lending THEM money…and THOSE returns are largely driven by market supply and demand.
When the Federal Reserve lowers interest rates, it also inadvertently lowers the treasury yield…which is what banks partially base their savings account payouts from. So, when treasury yields go DOWN…banks won’t make as high of a return on their money…and, therefore, they have less to pay YOU in interest…if that makes sense.
This is why the FED cutting interest rates doesn’t JUST impact Robinhood, even though they were the first to announce a reduction to their cash account…this will impact EVERY single bank out there, and EVERYONE will soon follow.
How much they decide to reduce interest rates will mostly depend on: how much those banks charge their borrowers, how much cash they have on hand, and how aggressively they want to keep their customers…the more their pay, the more likely they are to retain money…but that also means, the less money that bank is to make.
This is why ONLINE banks often can afford to pay WAY more for their savings accounts, because they don’t have high overhead, and they have more money left over to retain YOU as the customer and get your business.
Besides that…I would say that you should carry on as normal, invest with the expectation of holding long term, and consider shopping around banks if you feel like you can get a higher interest rate going somewhere else.
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com