Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Brokerage Cash Sweep
Transcript
- Lucas: Let me start with a number that might sting a little. If you have cash sitting in a typical brokerage account right now, the sweep rate — what your broker pays on uninvested money — is probably anywhere from 0.01 percent to maybe 0.5 percent. Meanwhile the average money market fund is yielding about 3.6 percent, and the Fed funds rate is 3.63 percent. Luna: So the spread between what you could earn and what you're actually earning on cash that's just sitting there could be three and a half percentage points or more. Lucas: Exactly. And with the 10-year breakeven inflation rate at 2.21 percent as of yesterday, any cash earning less than that is losing purchasing power in real terms. A dollar in a 0.01 percent sweep is going to buy less stuff next year — guaranteed. Luna: If this episode saves you even a few hundred dollars a year on lost interest, that's real money. And if today's conversation felt worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Lucas: Appreciate that. So let's dig into why brokerages pay so little on cash sweeps. It's not an accident — it's a business model. When you open a brokerage account, the fine print says uninvested cash gets swept into one or more program banks. Those banks pay the broker a fee for the deposits, and the broker passes along almost none of that to you. Luna: Right. And the catch is that the money is FDIC insured up to a certain limit per bank, but the rate is essentially whatever the broker says it is. Vanguard, Schwab, Fidelity — they all have different structures. Schwab, for example, has historically paid near zero on its standard sweep, while Fidelity offers a bit more if you opt into their higher-yield option. Lucas: Fidelity's core money market fund, the one many accounts default to, was yielding around 2.6 percent recently — better than 0.01 but still a full percentage point below the average money market fund you could buy yourself. And the key thing: you are not stuck with the default sweep. Luna: What's the move then? Just buy a money market fund manually? Lucas: Exactly. Most brokerages let you buy a government or prime money market fund with no transaction fee. The yield on a fund like VMFXX — Vanguard's Federal Money Market — was about 3.6 percent. That's a huge jump. Even after taxes, if you're in the 22 percent federal bracket, your after-tax yield is around 2.8 percent, still above the breakeven inflation rate of 2.21. Luna: So you're actually preserving purchasing power after tax, even if just barely. But what about state taxes? Some money market funds are exempt from state income tax if they hold enough Treasuries. Lucas: Great point. Treasury-only money market funds, like Fidelity's FDLXX, are often partially state tax exempt. For someone in a high-tax state like California or New York, that can add another 10 to 20 basis points of effective yield. So the real gap between the default sweep and the optimal cash vehicle could be even larger. Luna: Alright, so the fix is straightforward: look at what your brokerage is paying you on uninvested cash. If it's a tiny number, shift that cash into a money market fund you buy within the same account. That's a few clicks. But is there any downside? Lucas: A couple of things to watch. One: money market funds are not FDIC insured, though government money market funds invest in very short-term government debt and have never broken the buck. Two: some brokers charge a transaction fee to buy certain money market funds — but many have a family of no-fee funds. Three: if you need the cash for trading, you might have to sell the fund first and wait a day for settlement. But for most people, that's a small inconvenience. Luna: So the typical excuse — 'I don't want to bother' — costs you real purchasing power. Let's put a number on it. If someone has $10,000 sitting idle at 0.01 percent for a year, they earn one dollar. Move it to a 3.6 percent money market fund, they earn $360. That's $359 more, which after 22 percent tax is about $280. With inflation at 2.2 percent, the $10,000 in the sweep loses about $220 in purchasing power, while the money market fund keeps pace. Lucas: That's the right math. And if you're using a brokerage like Robinhood or Webull, their sweep rates may be different — some are actually competitive because they're newer. But the big legacy firms? They've been slow to raise sweep rates because they know most customers don't notice. There was actually a regulatory push in 2024 and 2025 to get brokers to disclose sweep rates more clearly, but it's still a mess. Luna: So what's the one-sentence takeaway? If you have cash in a brokerage account earning less than what a money market fund pays, you are losing to inflation. And the fix takes five minutes. Lucas: That's it. And if you want to go a step further, you can also look at high-yield savings accounts, which are FDIC insured and currently yield around 3.5 percent — similar to money market funds. Some online banks, like Ally or Marcus, are consistently competitive. Just be aware that transferring money from your brokerage to an external savings account takes a day or two, which might be an issue if you're an active trader. Luna: Given the Fed holding rates steady at 3.63 percent — the interest on reserve balances is 3.65 percent — and inflation data showing a slight cooldown in June's CPI, it's not like the gap is going to close overnight. So making this switch now locks in a real return for at least the next few months. Lucas: Let's talk about one more nuance: the difference between a prime money market fund and a government one. Prime funds can invest in corporate debt and have a slight yield advantage — maybe 10 to 20 basis points — but they also carry a tiny bit more risk and are not state tax exempt. For most people, a government fund is the sweet spot: safety, liquidity, and decent yield. Luna: So check your brokerage's money market fund options. If you're with Schwab, look for SWVXX or SNAXX. Fidelity has SPRXX or FDLXX. Vanguard has VMFXX or VUSXX. And then just buy it. Some platforms even allow you to set that fund as your core sweep, so future cash goes there automatically. Lucas: That's the pro tip. Once you set a money market fund as your default cash holding, you never have to think about it again. And if you need to trade, the fund is liquidated automatically to cover the purchase. It's seamless. Luna: Alright, so today we've covered exactly how inflation is quietly eating the cash you've left in a brokerage sweep, and how to stop it. Next time you check your portfolio, take a look at that cash line. It might be costing you more than you think. Lucas: Exactly. That's all for today. We'll be back tomorrow with another angle on protecting your money from inflation. Until then, keep an eye on your sweeps.