Last week Joe Rulison discussed the need to request a higher earnings credit rate (ECR) from your banks. As noted, the Fed Funds Target Rate has increased from the range of 0% to 0.25% in late 2015 to 1.00% to 1.25% in June of this year.

Yet during that 18+ month period the ECRs barely budged. Asking will help get you a better ECR, but it may not have an impact beyond that.

Asking is only the first step.

A higher ECR is only good to the degree you manage your balances to the correct level. Let’s walk through examples to illustrate the power of managing your balances.

Example #1:

Average Bank Deposit Average: $10,000,000

ECR: 0.25%

Annual ECR earnings: $25,000

Annual Fees: ($25,000)

Total Value of Cash: $25,000
Realized Gain: $0

In the above example, you completely offset your banking fees for the year. But with a higher ECR, you will need to lower your balances, or the effective ECR is still the same. Typically any excess earnings credit is not given to you in the form of interest; it is simply lost. Here is the example if you asked for and received a higher ECR:

Example #2:

Average Bank Deposit Average: $10,000,000

ECR: 0.50%

Annual ECR earnings: $50,000

Annual Fees: ($25,000)

Total Value of Cash: $50,000

Unrealized Gain $25,000

In this example, if you did not adjust your overall average balance, then the higher ECR did you no good. This loss is compounded when you realize you could be making at least 1.00% on your money when investing in the safest, most liquid investments, i.e., U.S. Treasuries.

Now let’s take a look at an example employing this strategy:

Example #3:

Average Bank Deposit Average: $5,000,000

ECR: 0.50%

Annual ECR earnings: $25,000

Annual Fees ($25,000)

Investment Balance: $5,000,000

Investment Rate: 1.00%

Interest Earnings $50,000

Total Value of Cash $75,000

Realized Gain $50,000

In this example, by properly managing your balance you’d increase the value your cash provided your organization by a whopping 300%!

However, doing this successfully requires good information. There are many variables that can impact ECRs, e.g., your relationship with your financial providers, and your ability to invest wisely without sacrificing safety and liquidity.

As always, the three+one team can provide you with all the information you need to be successful in maximizing the value of your cash. We look forward to helping you profit from today’s higher ECRs.

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We are pleased to welcome Lena Smith to the three+one team.

Lena Smith

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