Optimizing Your Savings
Sep 27th, 2007 by Wealth Builder [This post is written and copyrighted by Wealth Building Lessons (http://www.wealthbuildinglessons.com).]
Everyone should have an emergency fund set up with atleast 6 months of living expenses. As I explained the previous post, the most efficient way is to create a CD Ladder.
However, with rates being as low as they are, there may not be any difference in the interest rates whether you keep your money in a CD or a regular savings or money market account.
I keep all my emergency funds in a regular savings at INGDirect. But after the rate cut, I’m only getting an annualized yield of 4.3%. I know there are better options so I looked around to see whats available.
Here are the highlights of what I found:
Bank of Internet USA
FDIC insured upto $100,000.
ATM fee reimbursement.
Several types of interest-bearing Checking accounts with rates between 3.4% and 3.75%.
Savings rate under 2%.
CDs around 5%.
If you want an interest bearing checking account, this seems pretty good. However, the rates are no better than INGDirect’s Electric Orange for small amounts, and for larger deposits they’re lower.
HSBC
They currently offer an online savings account with a 5.05% rate.
Their interest checking offers a paltry 0.2% to 0.05%.
Capital One
Capital One has a very interesting Rewards Money Market Account. You get 4.66% yield and also get miles! I calculated on an account size of $50,000 you’d earn 30,000 miles/year which is pretty good. Another thing to consider is that you don’t get 1099’s for miles/points that are redeemed.
They also had CD’s in the 5% range.
Citibank
They offer an “ultimate” money account which yields 5%. However, there’s a catch - if you don’t do 2 electronic bill pays each month, you only get 4.5%.
Their Ultimate Savings account yields 4.75% - not sure if this is an introductory offer or not. But at this rate, Capital One’s Rewards Account seems better.
Everbank.com
Everbank currently has an introductory 6.01% rate for 3 months on Money Marketing and Net Checking accounts. It drops after that to 5.01%. They also have a large number of foreign currency CDs which I’ve coerced some of my friends to opening. I’ve invested in their Japanese REIT CD too.
Countrywide Bank
Countrywide’s new bank yields a whopping 5.5% in a Savingslink Account (for accounts with a minimum of $10,000) and their CD’s yield 5.65%. However amounts less than $10,000 only yield 4% in Savingslink. I have no clue what a Savingslink account is, but the rates on regular Savings for under $10,000 are pretty low at 1.25%. (They have various rates at different tiers so make sure you check your tier before opening an account).
The only problem with Countrywide is that if they go bankrupt (which is a possibility), it could disrupt access to your money. It is FDIC insured so you won’t lose your money but you might not be able to access it for a couple of weeks. And make sure you don’t keep more than $100,000 in any given account.
One issue with many of these tiered-rate accounts is that any amount in your account below the cut-off earns the lower rate of interest. Might as well just stick to INGDirect’s Electric Orange . If you have an amount greater than their tier cut-off amount, the entire amount earns the higher rate!
Bank of America
Bank of America currently has a 9 month CD offering 5.10% with a $5,000 minimum (as opposed to Countrywide’s $10,000 minimum in savings). Its illiquid but considering that interest rates are likely to decrease further, it may not
be a bad idea.
Paypal.com
Paypal’s money market account currently offers 5.21%. By far the best, but I wouldn’t trust a non-bank with my emergency money. According to their fine print “Money market funds are neither insured nor guaranteed by the FDIC or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 USD per share, it is possible to lose money by investing in the Fund.”
Looks like I’ll probably be opening accounts at several places! What’s your favorite bank?
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10 Responses to “Optimizing Your Savings”
I like that you have not settled for the return on your money from ING and have shopped around for other alternatives - no use losing out on any money for just a little bit of work.
The Dividend Guy
I have some of my free cash in my brokerage account. My account is linked to their money market and while I could potentially lose money, the money market account is returning about 4.3% which isn’t too bad. Great list though!
I have most of my cash at HSBCDirect for now because I took advantage of their special offer earlier this year. I moved a lot of money out of money market funds this year too. The reason for that is I took a look under the hood of some of those funds and I was shocked at how much they were invested in mortgage-backed securities. Until the subprime/CDO mess clears up, I would be careful with those because some money market funds are destined to break the buck.
I recently opened an account with Zions Bank in UT. They have an internet MMF which is paying 5.51% (APY) on balances over $50,000. There is check writing available on the account for free also as long as you write less than 4 a month.
I understand the desire for higher rates, however this is your emergency fund and as such you should be very safe with it. I keep mine in a local credit union that I can actually visit (as in physically visit the location). Why? Well, for one, last month NetBank went under. It was an internet-only bank. Yes, if you had less than $100K in there the FDIC will pay you back, but that could take months.
The other reason many of these banks are offering high rates (such as CountryWide) is that due to the current credit crunch they’re starved for capital. Given CountryWide’s exposure to this whole mortgage mess, I wouldn’t keep my emergency fund in there even if they promised me 10% interest. If the stuff really hits the fan I don’t want my money tied up in a promise to pay by the FDIC - yes, I’m sure they’ll pay me even if they have to print up the money, but again, it could take months to get at that money if the bank you’re in goes into FDIC receivership. I don’t want my emergency fund to be tied up for months.
Several of the big banks (Citibank, BofA) that have recently gotten 23A exemptions from the Federal Reserve. What that means is that the Fed is allowing them to put a lot more of their money into the investment side of the bank (normally the limit is 10%, but now the Fed is allowing several of these banks to put in up to 30% in their investment banking side) - why? Because of the current credit and MBS (mortgage backed security) crisis. These banks have taken large losses and they need to shore up their investments - it’s either that or they would be forced to sell these MBS and CDOs and the likihood is that right now they wouldn’t get much on the open market which would mean HUGE losses for these banks.
holy cow! i have most of my savings in Bank of America. I think it might be better off in a brokerage account with NO MBS exposure! [most brokerages are SIPC insured which means its insured upto $500k instead of the FDIC limits of $100k].
I’d also feel much safer with my money in AUD instead of USD!
thanks for the info Phil!
Oh, and I wouldn’t keep my emergency fund in a money market fund which is not insured by the FDIC. In the past money market funds were considered quite safe, however, in the last few months the commercial paper markets (which the money markets are based on) have been very scary because it turns out that some of them are heavily exposed to the mortgage markets. Some of these are actually invested in the SIVs (Structured Investment Vehicles) which are off-book investments (gambles) by some of the big investment banks. Last month one of these supposedly very safe commercial paper outfits in Canada went under. Be very wary about the money markets at this point. You want to make sure that the ones you are in are not exposed to the mortgage markets in ANY way.
I believe there are some money market funds from Vanguard that are based entirely on US Treasuries - those would be safe - but do double check. Anything backed by Treasuries/T-Bills is a safe bet - they’re not yielding much at this point so make sure you’re in short term treasuries. If you live in a high income tax state treasuries are a bit better since they’re state incomes tax free.
again, you’re quite right on the Money Market topic too!
I haven’t talked about it but putting money in MMs is quite risky. Nearly all of them have some MBS/SIV component to them.
Watch out for PayPal… I used to keep my money there, but if someone cracks your password it’s real easy to go on a shopping spree on eBay. However, if someone cracks your password for ING, all they can do is withdraw your money into your savings.
Hi,
In a few months time I will have a bit of spare cash to invest.
I do not know enough about stock market and it seems to be bad news at the mo - my boyfriend just lost £1000 in a couple of months. I will have few thousands spare sometime soon and I am looking for somewhere to invest - short term and high returns.
I have bought a small ruin in rural Spain dead cheap last summer and will resell it in spring. I believe that is the quickest way to achieve it and will look for another property, probably in Croatia as there are plenty of old stone abandoned rural houses there with future potential for resale. Any words of advice?