LaSalle Bank (now owned by Bank of America) is offering a $100 bonus for opening a checking account, savings account, and using the debit card once. Likes like you need $250 for the checking and $100 for the savings. Keep the minimum amount in there ($250 for checking, none for savings*), and that’s a very nice rate of return.
In addition, you can even fund with a credit card (up to $1,000 per account) and have it count as a purchase. Great for those with rewards credit cards.
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Back in April I shared my personal bank account setup which I felt offered the best balance of convenience, liquidity, and interest paid out for my geographic location and tax situation:
Basically, I used my Washington Mutual Free Checking / 5% APY Savings (see review) account combo as my core account, but kept most of my money in T-Bills for the higher yield and state income tax exemption. Since then, a couple of things have changed…
First, the rates on 28-day Treasury Bills started to drop significantly, making their tax-equivalent return unattractive. They remain so today, as even the 6-month T-Bill rates are unexciting. In May, FNBO Direct (review) came on the scene and offered 6% APY until 9/28. So as my T-Bills matured I gradually moved them into FNBO.
Then 3 weeks ago, the Fed Funds rate was cut for the first time in years, which caused many banks to adjust the interest rates paid out on high-yield savings accounts. FNBO dropped their rate to 0.85% APY. I have been waiting for the dust to finally settle since, and I think it has since the speculation is now about what will happen during the next Fed meeting at the end of October.
Through all this, the WaMu (online-only) savings account has stayed constant at 5% APY. I’m surprised! I must say though, I’ve been enjoying this sort of “Core and Explore” setup for bank accounts. Most of my day-to-day activities like online billpay, checkwriting, deposits, ATM withdrawals, even getting money orders – they can stay stable and familiar with WaMu. I can also keep a nice chunk of money within quick reach, but still earning 5%. Then I get to rate-chase online with the rest of my temporary $100,000 cash hoard. 🙂 So I think I’ll keep this way as long as I can:
So what is the Bank du Jour? Well I just mailed in my check and signature form for Everbank’s FreeNet checking account last week, but it hasn’t been cashed yet. I like that the 6.01% APY is guaranteed for 3 months, and my Rate Chaser Calculator says the move should clear me at least another $100 over those few months. It may not be as lucrative for smaller balances, but to each their own.
Lots of e-mails coming in from banks today…
HSBC Direct drops from 5.05% to 4.50% APY. Yeesh… not a good sign for online savings accounts in general!
FNBO Direct announces that the new rate as of 1/13/13 is 0.85% APY. Ho-hum, about what I expected. They did also announce a 2% cash back credit card, but only for 12 months. Bye, FNBO, it was fun while it lasted. Currently, I am moving back to my local Washington Mutual checking/saving account. I’m undecided where to go next if I’m going to rate-chase.
Maybe one of these previously-discussed options, maybe Bank of Toledo, but that 10 debit card transaction requirement is a pain and I’m skeptical about how long the 6.01% will last.
Capital One 360 is still at 0.75% APY but is offering a $50 sign-up bonus, higher than the usual $25. Via reader Scott.
Pentagon Federal Credit Union is now offering 3, 4, and 5-year CDs at 6.0% APY. If you’re looking to lock up rates for this long (I’m not), these rates look pretty good. Early withdrawal penalty is 6-months of interest. Membership required, you can join the NMFA for $20 if you don’t qualify otherwise.
(Update) Emigrant Direct is now at 4.75% APY, down from 5.05%. Could have been worse, eh?
With all this talk about the Fed Funds rate drop, a lot of people are wondering what it means for consumer rates like savings accounts, credit card APRs, and mortgage rates. Here, I wanted to explore the savings account relationship. First, some quick definitions:
What is the Fed Funds Rate?
With our current system of fractional-reserve banking, US banks only have to keep a certain amount of money reserved at all times – Currently, it’s only 10% of checking account deposits and nothing (!) on time deposits like savings accounts. Banks usually try to keep as close to this minimum as possible, so that they can lend out the rest at higher interest rates and make that juicy profit.
In order to stay as close as possible, banks often lend money to each other overnight as needed. One bank may have extra in reserves, while another may temporarily not have enough, and this way it’s win-win. The target interest rate for this is the Fed Funds Rate (FFR).
What is the Fed Discount Rate?
This is the exact interest rate at which banks can directly borrow from the Federal Reserve. This is usually a last resort, as such loans are an indication of financial weakness and subject to audit.
What is the relationship between the Fed Funds Rate and interest rates on high-yield savings accounts?
This is just my own speculation, but I would imagine that banks would not want to offer significantly more than the Fed Funds rate. Why would you pay 6% interest out to individuals when you could just pay 5% to another bank? Still, I doubt that banks can borrow an unlimited amount of money via other other banks, so they may be willing to pay a bit more than the FFR if they have the ability to make a profit. Finally, they may just be operating at a temporary loss in order to grab some deposits that hopefully will stay later from branding or just convenience (*cough* FNBO Direct *cough*).
Here is a historical chart of the Fed Funds Rate versus the APY paid by online banks Capital One 360 and Emigrant Direct. I chose these two because they have (1) been around longer than others, and (2) are online and as such should be operating with the thinnest margins. The data points for ING should be close, but not perfectly accurate, as I used Archive.org at 2-month intervals for rate info not available in my own archives.
You can definitely see some correlation, but it’s not perfect. It looks like ING was more aggressive in 2002-2004, and then gradually become satisfied with fatter margins. Emigrant seems to be following the curve closely, which would indicate an interest rate drop soon. So if you want to predict the interest rate of your own bank, not only do you want to look at the FFR, but also the bank’s historical margins and whether they are looking to gain (or simply defend) market-share.
A little birdie told me to expect an FNBO Direct rate definitely under 5% after 9/28. I’m just writing this here to see if it turns out to be correct.
I’m sure you’ve heard by now, Bernanke and Friends cut the Fed Funds rate by 50 basis points to 4.75%. It was the first rate reduction in 4 years, which then spawned the biggest one-day gain in the Dow in about the same time. It seems like everyone has an opinion on the Fed rate cut. Some said it was needed to curb the hysteria and possible recession, while others thought it was just a bail-out for people who took unreasonable risks and now don’t have to pay the price. Personally, I think it’s just trying to delay the inevitable, but I’m no economist. I always try to keep a long-term view on the stock market, so I’m not that concerned there. So how else will this affect things?
Savings Account Rate Drops?
Capital One 360 has already dropped their savings rate from 0.80% to 0.75% APY as of today (plus their checking tiers as well), and I expect some other high-yield savings accounts to follow. I think one hope we have is that banks may want to stay at 5.0% for psychological reasons. If you want to lock in some 6-month or 1-year certificates of deposit, I wouldn’t wait too long to do so. Anybody notice any other drops?
Mortgage Rate Drops?
Personally, I’m hoping that this rate drop doesn’t work, and the the housing market continues to weaken. That way, I can still get a low mortgage rate with our excellent credit, and a house at more reasonable prices! But I wonder if significantly lower mortgage rates will actually occur…
Bank of America now has their own high-yield savings account, though with a minimum balance. You won’t find it advertised though, it’s tucked away in their new My Expressions banking section. If you click around the various organizations, you’ll see a variety of checking/savings combos with different interest rates. The two highest I found were the Humane Society and the Defenders of Wildlife. Here are the current rates for those two groups as of 9/17 for Oregon:
You need $1,000 to open, and a minimum daily balance of $2,500 to avoid a $12 monthly maintenance fee. If you already bank with BofA and can always keep $2,500 in savings, this looks like a great way to boost your interest rate from the usual piddly 0.20%. Be sure to look at the ‘Money Market Savings’ account, not the ‘Regular Savings’ account. Can’t find it? It took me a while too, so I went ahead and made a video showing how to locate the account online.
If you are already have a BofA account you can login at the bottom and have the application pre-filled for you. New customers will experience a hard credit pull. Per a phone call, you don’t need to be a member of the actual association to apply for the account. I just hope these high rates don’t disappear once everyone finds out about them! (Though I’m not helping…) Thanks goes to Trice and BankDeals.
Update on 9/21: The rates have dropped to a range of 4.65% for $2,500+ to 5.01% APY for $50,000+.
Many people who are with FNBO Direct right now earning 0.65% APY are asking – What is FNBO Direct’s rate going to be after September 28th? After a few phone calls, the official answer is apparently “We’re not going to tell you until we have to… on 9/28.”
This is actually pretty smart on their part. If they announced that the rate is going to drop now, then people may already start moving their money out. It’s better to keep us in suspense, playing off our hope that it will somehow stay high. I personally feel like it’s going to go back to 5.25% at the highest, otherwise they would have told us to kept us from preemptively moving. But that’s just my guess.
If this turns out to be the case, then the rates for no-minimum balance, no-monthly fee, liquid savings accounts will be again clustered closely around (a respectable) 5% APY. For those that want to keep chasing, I also tried to find the best combination of highest rate, FDIC-insured, lower minimums, and high liquidity:
6.01% APY for up to 6 months from EverBank, $1,500 minimum
Although this is technically a promotional rate for their FreeNet Checking Account, since it’s guaranteed you could simply treat it like a 3-month, 100% liquid CD paying 6.01% APY. Here are the details:
After the first 3 months (assuming it’s still available), you can then open a Yield Pledge Money Market that also has 6.01% APY for 3 months. Also $1,500 minimum to open. It has more restrictions since it’s a savings account as well as a monthly minimum balance, so go with the Checking first. In total, this offers up to 6 months more of 6% goodness.
5.70-5.75% APY from IndyMac Bank
Indymac Bank has seen some troubles from the subprime loan mess, even though it specialized more in “Alt-A” loans, which are between prime and sub-prime in quality. However, it does offer some of the current top FDIC-insured rates. Here are two options:
$5,000 Mininum – Internet CD
$25,000 Mininum – Internet First Rate Money Market
Indymac’s FDIC certificate number is 29730, and it has a 2 star “Below peer group” Safe & Sound rating. Worried about their financial health? Check out my post exploring What happens if my bank goes bankrupt or fails? There may be ways to expand your $100,000 FDIC coverage.
For a while now, online payment service PayPal.com has offered an extra reason to keep money in their accounts – a money market fund paying around 5% interest annually. I get asked about it regularly, and here I will explain in detail why I do not recommend keeping any significant amount of money in this account.
Now, when you think about a money market account, what are the top three things you look for? Here are mine, from most important down to least important:
I’ll address them in reverse order:
Yield
Its 7-day average yield as of 8/16/07 was 5.04%. This isn’t bad, and historically the fund has offered competitive rates, although they are not necessarily the highest. In looking at the prospectus [pdf], these higher yields appear to be the result of temporary fee waivers. Without the ongoing fee waivers, the yield would be about 0.70% lower. Whether or not they will keep the yield competitive with these waivers in the future is unknown.
Safety Concerns
As with all money market mutual funds, they are not FDIC insured. PayPal is not a bank. However, the money market fund is still subject to the same restrictions as any other retail money market fund, and must invest in the highest rated securities out there. In addition, PayPal is a subsidiary of eBay, and the fund is run by Barclays Global Investors, a big name that manages trillions of dollars of assets. A retail money market mutual fund has never gone below the standard $1 per share for an individual investor, and I don’t expect it to here.
However, there is also the different safety concern of what happens if someone fraudulently gains access to your account. If someone hijacks your bank account, what can they really do? They can’t just go out and buy something. In order to set up an online transfer, they still need to provide account and routing numbers to a bank account with the same name on the account. Even if you do lose money, you are protected by Federal Reserve Board?s Regulation E and have your personal liability capped.
On the other hand, PayPal is inherently risky because it allows the instant ability to spend your money! In fact, they can send money to anyone with an e-mail address. If someone steals your password, they can start sending money right away to various vendors and other users. Such fraud can be very hard to track. And then who decides if you get your money back? PayPal.
There are countless complaints of people who’ve been on the bad end of a PayPal dispute. I’d be very careful. Worst case – you lose money!
Liquidity
Again, here PayPal gets to write it’s own rules. It is not a bank, and is not subject to the many regulations that a bank has to follow. They can freeze your account at any time. PayPal froze my account once for no good reason. (Unless you count a complaint of one nervous buyer who mistyped his tracking number and thought I was scamming him.) This can lead to weeks if not months of faxing them different documents in order to prove you’re you, or you didn’t scam someone else, or whatever. Meanwhile, you can’t withdraw any of your money, and they may even take some of it away from you.
The point here is that you are not guaranteed access to your money. Again, PayPal is sole judge and jury.
Conclusions
The PayPal Money Market Fund account, while offering a decent interest rate and a little bit of added convenience, fails to satisfy the two most critical requirements of a cash savings vehicle – to maintain the highest levels of both safety and liquidity. Sure, if you use PayPal a lot, you might sign up for it to earn a bit of interest on your in-transit money, but I wouldn’t keep large sums of money in such an account.
There are so many other FDIC-insured, highly-regulated banks that offer similar levels of interest and easy online access, why would you want to?
An alternative to high-yield bank savings accounts are money market funds held in brokerage accounts. Although both money market funds and savings accounts can change their interest rates paid at any time, comparing their actual returns can be confusing.
Comparing Returns
Money market funds usually report their 7-day annualized yield (also listed as just yield, or 7-day yield), which takes the interest paid net of expenses for the last 7 days and assumes that this average continues over an entire year. Compounding is not taken into account, so the 7-day yield should be compared to a bank account’s annual percentage rate (APR).
Some funds also list the 7-day effective yield (also listed as compound yield), which does take into account compounding via the reinvesting of dividends. So the 7-day effective yield should be compared to annual percentage yield (APY).
Here are two examples from Fidelity and Vanguard where they list both. In this case the Fidelity fund would be comparable to a bank account earning 5.07% APR or 5.19% APY.
Since banks usually advertise APY, you can convert if needed using this APY to APR calculator. Keep in mind that since these are moving 7-day averages, the numbers given will change from week to week.
Other Types of Money Market Funds
The above comparison is meant for the most common “taxable” money market funds, which are taxalbe on both federal and state levels just like a bank’s savings account. In addition to these, there are a variety of specific types of funds like Treasury funds (exempt from state income tax) and municipal tax-exempt funds (exempt from federal income tax), and state-specific municipal funds (exempt from both fed and state taxes) that offer special tax consideration.
In this case, you can use a tax-equivalent yield calculator to complete the comparison.
But Is The Risk The Same?
While not eligible to be FDIC-insured as they are not banks, money market funds do have to follow strict guidelines as to maintain the highest credit quality and lowest volatility of the underlying investments. The share is always kept at $1. Due to the recent concerns with mortgage-backed bonds, Fool.com recently asked Is Your Money Market Fund Safe? In my opinion, the risk is a definitely higher than a bank account, but if you hold your money market funds from a respected firm like Vanguard or Fidelity, I would sleep just as soundly, as these companies would repay the funds with their own assets rather than let them falter.
There are also other practical differences between specific banks and specific money market funds, which I am ignoring here.
Everybody has a high-yield savings or checking account paying 4% or more, right? Here are a few other ways to maximize your bank balances and therefore your interest earned.
Stop withholding too much of your taxes
Did you get your tax refund? If so, that means you withheld too much on your paychecks last year. To fix that for this year, you should consider underwitholding your taxes for profit. You can control your withholding amounts by increasing the number of allowances on your W-4. To see the effects of doing so ahead of time, use the calculators at PaycheckCity.
The easiest rule of thumb to avoid any underpayment penalties, if your income will increase, is to simply pay as much taxes this year as you did last year. Since you don’t have to pay in full until April 15th, putting off $4,000 in taxes until it’s due can earn you over $100 in extra interest.
Pay down even small credit card balances
According to recent Federal Reserve study1, many household still carry small balances of a thousand dollars, even though they have the cash available in savings accounts to pay it off. Perhaps people feel that there is safety in having that extra money in the bank, but in reality credit card can be part of your emergency strategy, especially if you already have balances now. You can pay a variety of critical bills with credit cards now – hospital charges, car repairs, groceries, and more. Paying 15% in interest to the credit card companies while only earning 5% in the bank is a losing proposition, and may result in losing hundreds of dollars a year.
If anything, you should flip this in your favor and borrow at 0% and earn 5% from the bank on that money.
Maximize the float on your credit cards
Another benefit of paying your bills in full is that you get the grace period, which is the period between the end of your statement is generated and when the payment is actually due. During this time (about 20-25 days), you don’t have to pay any interest on your balance in addition to the time you have gotten during the billing cycle. Therefore, I like to use Online Billpay to schedule my credit card payment until very close to the due date.
Here is an example using my WaMu account setup (using the Checkfree Billpay system used by many other banks). If you have $1,500 due on June 29th, I will set my checking account to pay by June 28th (Deliver-by date, with 1 extra day of buffer). Then, I just schedule a future transfer from savings to checking of $1,500 on June 24rd, which is the earliest day which the money may be debited (Start on date). That way, my money is staying in my 5% savings account as long as possible. All in all, very little extra time involved as compared to simply paying the bill online. If you’re just starting this out, you may want to set it with a larger buffer times.
If you have a card issued by FIA (formerly MBNA), some people extend this even further by using the BillPay offered by some FIA cards, which allow you to pay certain bills by putting the balance on your credit card. You aren’t actually paying via credit card so you don’t earn any cashback or rewards, but you can get several more days of interest-free, or “float”, time.
If used together to keep your balances high, these strategies can add hundreds of dollars to your bottom line each year.
1Source and reference: SmartMoney magazine article 7 Money Mistakes to Avoid (only partially available online).
While we’re on the topic of international banks, US-based Everbank does offer FDIC-Insured Certificates of Deposit denominated in various world currencies:
The three that stand out in interest rate perspective are the Icelandic krona, the New Zealand dollar, and the South African rand. But as I’ve said before, you are at the mercy of the future exchange rates on these currencies, so these should not be considered the equivalent of a dollar-denominated bank CD. FDIC only insures against bank failure – there is still the risk of loss of principal in these investments. According to Oanda, the exchange rates of the US dollar to the krona (USD:ISK) has varied by 23.4% within the last year, the New Zealand dollar (USD:NZD) has varied by 23.7%, and the South African rand (USD:ZAR) has varied by 19.3%.
From Wikipedia entry for the Icelandic krona:
As it stands, the Icelandic currency is a fully convertible but low-volume world currency, strongly managed by its central bank, with a high degree of volatility not only against the US and Canadian dollars, but also against the currencies of the other Nordic countries (Swedish krona, Norwegian krone, Danish krone and the euro). For example, during the first half of 2006, the Icelandic kr?na has ranged between 50 to 80 per US$.
If you bought US$100 of Icelandic Krona at 1:50, have it earn 15% in a year, but then exchange it back to US dollars at 1:80, you’d still be left with only US$72. Not so hot. Of course, if the opposite happened you could end up with $184! So really this seems like a way to make a bet against the dollar with a little bit of appreciation mixed in, if you feel so inclined. I’m amused by this option, but I think I’ll leave the gambling to Vegas for now. (The minimum investment is also $10,000.) I do want to visit Iceland though – perhaps for “investment research”? 😉
Added
Commenter Andy astutely points out that you’ll essentially be charged 1% in and out for a currency exchange fee as well – “The currency conversion rate will be within 1% of the wholesale spot price EverBank pays for the currency.” This will especially hurt the shorter-term CDs.
If you would like some more background on why interest rates in Iceland are so high, check out this NY Times article on Iceland’s fizzy economy. They are trying to tame inflation fueled by a hot stock market and housing boom, and definitely gives the vibe of a potentially volatile situation.
You have seen via Google Ads on my or other financial sites advertising 8% CD rates from Millennium Bank. Wow, sounds great! But given the internet age, when you see “bank”, it could be from any corner of the world. The terms “certificate of deposit” or “savings account” may imply security here, but don’t necessarily mean anything internationally. The FDIC website gives some good guidance on Safe Internet Banking:
Read key information about the bank posted on its Web site.
Although it tries to distract you by saying it is owned by some Swiss trust company, if you read further it you find that Millennium Bank is located in the Caribbean nation of St. Vincent and the Grenadines (SVG). So, it’s not even located in the United States. From Wikipedia, St. Vincent has a population of just 119,000, it’s main industry is banana production, and has an unemployment rate of about 22%. Also of interest:
There is […] a small offshore financial sector whose particularly restrictive secrecy laws have caused some international concern.
Does this sound like a place that you would want to keep your money? Maybe if you were trying to hide it! If something goes wrong, do you want to navigate a foreign system to get your money back?
Verify the bank’s insurance status.
This bank isn’t even located in the United States, so there’s no point in even running a bank search to see if it is FDIC insured. It doesn’t even appear to insure its deposits by any private or public agency. If a bank claims to be a subsidiary of a bank that is FDIC-insured, call the parent bank. If they’ve never heard of it, run away.
Gut check: Is it too good to be true?
Finally, risk and return are closely linked in legitimate bank products. If the best any other bank can do is barely 6%, there’s virtually no way a bank offering 8% return with the same level of risk. They have to be doing something riskier, whether it is making some currency bets or investing in lower-quality debt. Given the lack of disclosure of what these risks are, you might as well buy some junk bonds, which are at least rated by reputable independent companies.
Bottom line, I hope you’ll agree there’s absolutely no reason to put your money anywhere near this institution.
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