🎯 Low-risk returns are back

👋 Good afternoon finance enthusiasts and fellow investors!

Thank you so much for the responses to our email last week. I'm glad it was helpful to so many of you! I will probably put the Net Worth Tracker template on my website for everyone to use in the future.

As I hinted last week, today we're going to dive into the money market and talk about a way to use money more efficiently without a lot of risk. All of this is relatively new, by the way, because interest rates have changed. Let's gooo!

💎 TL;DR

• Money markets offer low-risk investment opportunities

• Don't let your money sit around idly - open a call money account

• Step-by-step explanation of how to find the best deals (no matter where you live)

The information provided in this newsletter is for educational and informational purposes only and should not be considered as financial advice.

🧠 Capital Market vs Money Market

I'm sure you've all heard of the capital market, but the term money market is probably new to many of you. And yes I know we all hate theory, but I try to keep it short and simple 🤓

Think of the money market as a marketplace for short-term borrowing and lending, like a pop-up store that sells and buys things quickly. Here, people lend and borrow money for a short period, usually less than a year, by using financial instruments like treasury bills, certificates of deposit, and commercial papers. The money market is like a low-risk, low-return investment option.

The capital market, on the other hand, is like a permanent store that sells long-term investments, like stocks and bonds. People buy and sell these investments to raise money for long-term projects, like building a factory or a new highway. The capital market is like a higher-risk, higher-return investment option.

Both markets play an important role in the economy, helping people and businesses get the funding they need to achieve their goals. Both markets are heavily influenced by the increased interest rate situation. Although this is bad for the capital market, the money market has become more interesting as an investor.

Let's dive deeper into the money market and the different types of accounts.

💡 Types of accounts

• Checking accounts: Checking accounts are designed for everyday transactions like paying bills and making purchases. They usually don't offer high interest rates, and if you keep a lot of money here, you're wasting a lot of potential.

• High-yield savings accounts: These accounts are a great option for beginner investors because they are easy to open and offer higher interest rates than regular savings accounts. They typically require a low minimum balance and offer easy access to your funds.

  • In case you missed it: Apple is breaking into banking

• Money market accounts: These accounts are similar to high-yield savings accounts but may offer a slightly higher interest rate. They may require a higher minimum balance and come with more restrictions on withdrawals and transactions.

• Call money accounts: These accounts are similar to money market accounts but have shorter terms (often only one day). They are a good option for investors who need quick access to their funds. I just opened such an account.

🎲 Let’s talk numbers

Currently, many banks are launching promotional offers to entice people to open an account. I explain below how you can find these offers. Since I'm from Austria, I'm focusing on banks in Austria and Germany (both German speaking & similar laws). Last Friday I opened an account with the following details:

Call money account; 3.1% p.a. for 6 months; no lock-up period; no fees; monthly interest coupon, online account management. Read more

To assess whether it makes sense to open a new account, you should calculate the expected return you will earn.

To calculate the expected return, you can use online calculators or use my Google Sheets Template.

Example calculation, try it with your own numbers here

Enter the principal amount, the annual interest rate, the compound interest interval and the number of periods (months/years).

Here are some examples for various principal amounts and interest rates.

Lookup table for annual interest generated

Next, consider approximately how long it will take to open the account, deposit money, withdraw money, and close the account. For an online bank, I expect 2 hours (1 hour to set up, read the fine print and verify identity, 20 minutes to deposit, 40 minutes to withdraw and possibly close the account after the promotional period).

In the end, divide the expected return by the amount it will take you, and you'll get a sense of whether it's worth your time. Of course, the more money you invest, the more sense it makes.

🔍 How to find the best offers

I can only give you a general explanation, as the search for these offers depends on your country. In general, search for “{Account type} {country} comparison” in the language spoken in your country.

Examples:

• For US readers: Call money accounts US comparison

• For DE/AT readers: Tagesgeldkonto Vergleich

Check several sites and use them only to find the offers and do not rely on the information published there. Check the details always on the official website of the bank. Here is a list of things I looked for when searching for the best offer.

🔑 Things to consider

The following aspects are important when choosing the best offer:

• Fees: Should be 0 or very low.

• Money locked? The longer the lock, the more return.

• Government deposit insurance: Make sure this is included! Check the max amount.

• Guaranteed interest period: Should be as long as possible (e.g. 6 months or a year). Will decrease dramatically for many banks thereafter after the promotional period.

• Interest distribution? e.g. monthly

• Needs online banking! We don't want to drive around just to open a bank account, that costs time.

• Minimum / Maximum balance?

• Think about how much time you need to do this (as explained above, I would say 2 hours).

• Make sure you can move to the next bank after the promotional offer if it makes sense (time and financially)

• Do your research to make sure the bank is reputable! Don't fall for online scams. Reach out if you need help.

🎯 Action steps

Okay, so you should have learned something new and be ready to take action and get the most out of your money with almost zero risk. Here's a quick step-by-step guide:

1. Check to see if you currently have unused money

2. Decide between the different types of accounts we've already discussed

3. Look for the best deal available

4. Open an account, deposit money and enjoy your return on investment

5. Reply to this email and let me know how it went!

Let me know in case you have questions or need help.

That's it for this week. Enjoy your weekend!

Cheers

Stefan