I have said several times that all investors should have some of their money in cash. Not only does this allow you to have an emergency fund to cover any unforeseen expenses, but it also gives you the flexibility to take advantage of investment opportunities as they come up.
But what should you do with your cash? When it comes to investing, every little bit helps, so it seems silly to keep your money in a checking or savings account that pays little or no interest. With that in mind, let's take a look at Barclays' (NYSE:BCS) Dream Account, which gives you the peace of mind that comes with having available cash, while allowing you to earn some returns on your money.
About the Dream Account
Barclays' Dream Account is a nice alternative to the savings accounts offered by most of the big banks, many of which pay interest rates as low as 0.01%.
The Dream Account has a best-in-breed 0.95% APY, and offers account holders the chance to boost their returns even more.
Account holders can earn a bonus of 2.5% on the interest that they've earned after six consecutive months of deposits, and another 2.5% bonus after six months with no withdrawals. If you qualify for both bonuses, it pushes your APY to nearly 1%.
There is one small "catch". Your initial deposit into a Dream Account cannot exceed $1,000, and monthly deposits are also capped at that amount. So, if you need a place to put a larger sum of cash, you might need to opt for Barclays' regular online savings account, which pays a slightly lower 0.90% APY.
Why should I bother for such a low interest rate?
Let's say that between your emergency fund and cash you want to eventually invest, you have about $20,000 in cash at any given time.
Well, if you keep it in a checking account, safe deposit box, or even under your mattress, no matter how much time has passed, you'll still have $20,000.
If you put in in a higher-interest account like this one from Barclays, your money will earn $190 after one year. So, while that is a rather poor rate of return when compared to pretty much any other class of investment, it is $190 you wouldn't have otherwise.
And if you chose to take your $190 from just a single year and invest it for your future, it could mean an extra $3,000 or so in 30 years, based on the S&P's average annual return. If you keep your cash in an account like this and invest your interest each year, it's easy to see that, over time, this is no small chunk of change. That's why it's so important to squeeze the maximum return out of all of your investments, including your cash.
Alternatives to the Dream Account
Of course, you could put your cash in a CD and possibly earn a slightly higher rate of return. However, bear in mind that one of the biggest reasons for keeping some cash is that it is readily accessible. If say, an emergency arises, the fees you have to pay to withdraw from a CD early are likely to outweigh the higher interest rate you receive.
There are some other savings accounts that pay comparable interest rates from banks such as Ally Financial and GE Capital (NYSE: GE), but none that are higher than the 0.95% plus bonuses offered by the Dream Account. One of the main ideas behind finding the best account for your cash is that "every little bit helps", so the small difference in interest can make a significant difference over the long run.
In a nutshell, it is important to realize that small differences in returns can make a huge difference in your long-term performance. One area where this fact is often overlooked is with cash accounts, and Barclay's Dream Account allows you to keep some cash on the sidelines while still generating some income.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.