First, what the hell does disintermediate mean? It’s an economic term meaning to move your funds from one institution to another to achieve a better rate of return.
We are now rolling back the clock to the 1970’s, so don your platform shoes, your bell bottoms, turn on the strobe light and put your disco ball back up. We are back on the throes of higher inflation and interest rates.
When interest rates fall, institutions quickly move the rates down that they are paying to their depositors, but when interest rates rise, institutions hold back raising their depositor’s interest rates. On the lending side, when interest rates fall, institutions take their time moving lending rates down, but when interest rates rise, institutions hike their lending rates as quickly as they can.
Institutions do this simply to make more money. So, if depositors ignore rising rates and don’t disintermediate their funds to deposit at higher paying institutions, the institutions are happy to accommodate. Meanwhile, the depositor gets lower returns.
Money markets are raising their interest rates again after a long period of “Rock Bottom” rates. So check around to see what other institutions are paying if you have a good amount in money market funds. Money Market funds are NOT created equal. With the internet, it is easy to move the funds electronically from one institution to another.
The calculation of your returns is very easy to do, if you don’t access those funds a lot (put in and take out). The calculation to determine your rate of return is simple. Divide the interest paid at month end by the beginning balance (assuming you didn’t add or remove any funds that month), then multiply the result by 365 divided by the days in the month). For example, if you have 10,000 and it pays 8 dollars for the month of April, the formula is 8 divided by 10,000 times 365 divided by 30, or 8/10000*365/30. The annualize interest rate is .009733% - not much to write home about!
Platform shoes can be hard to walk in, especially, with a strobe light on! So, don’t let your money market trip you up.
Be smart, be well-read, be aware and be successful.
