Cash Reserves Update: Best Available Interest Rates – March 2013

Our family keeps a full year of expenses put aside in cash reserves; it provides us with financial stability with the additional side benefits of lower stress and less concern about stock market gyrations. Emergency funds can actually have a better return on investment than what you see on your bank statement.

I’ve been slacking in terms of updates on this topic. While I still like to maximize my interest, there just hasn’t been many new developments that make me want to jump from one bank from another. However, if you haven’t optimized your cash recently, you may be stuck in a money market fund or megabank saving account paying 0.05% or less. You can definitely still do better than that! Here are what I consider the highlights of the best currently available interest rates.

Certificates of Deposit

If you have a large cushion, it’s quite likely to just sit there for years or more. Therefore, you may wish to put some of it in longer-term investments where you can take the money out in a true emergency and paid an early withdrawal penalty.

  • Everbank’s Yield Pledge Money Market and Interest Checking account both offer 1.10% APY guaranteed for the first 6 months for new accounts. Since it is fixed, this is essentially a 6-month CD with a higher rate than any other 6-month CD rate out there and with no early withdrawal penalty to worry about.
  • Ally Bank Raise Your Rate CDs have a rate bump feature; the 2-year term pays 1.05% APY and the 4-year term pays 1.30% APY (as of 11/1/13). You can change your rate after your account is opened — if their rate on this CD goes up, yours can bump up to match it (one interest rate increase with the 2 year term, two interest rate increases with the 4 year term).They also offer traditional Ally Bank High-Yield CDs with 3-year CDs at 1.20% APY and 5-year CDs at 1.60% APY (as of 11/1/13) currently. Early withdrawal penalty is only 60 days.
  • Discover Bank CDs are currently offering 3-year CDs at 1.25% APY, 5-year CDs at 1.65% APY, 7-year CDs at 1.80% APY, and a 10-year CD at 1.90% APY. Early withdrawal penalty varies from 6 months for the 3-year to 15 months on the 7 and 10-year CD.
  • PenFed Credit Union CDs are currently offering 3-year CDs at 1.60% APY, 5-Year CDs at 1.65% APY, and a 7-Year CD at 1.75% APY. Early withdrawal penalty varies from 6 months for the 3-year CD to 12 months on the 5 and 7-year CD.

Ally Bank’s Flexible Certificates of Deposit

Ally Bank LogoLet’s focus on the Ally Bank certificates of deposit, where you can still access your money as long as you pay a early withdrawal penalty of 60 days interest – significantly less than at other banks. Why is this good?

Let’s analyze a CD paying 1.54% APY (as of 4/8/13) with an early withdrawal penalty of the last 60 days of interest. Here’s how your actual annualized interest rate would fluctuate given your holding period.

As you can see, if you hold it a year and withdraw, you are already at 1.28% APY – higher than other 12-month term CD that I can find. The rate on this CD keeps falling, but it’s still one of the better options out there. I have older 5-year CDs paying 2-3% APY, but the current rate for new deposits is 1.54% APY for a 5-year CD.

Rewards Checking Accounts

Usually through smaller credit unions with limited membership areas, these checking accounts pay a higher interest rate if you jump through several hoops designed to force you to make it your primary account. However, if you make a mistake you’ll forfeit virtually all your interest for that month, so it can be tricky. Rates also tend to drop quickly once word gets out of a juicy offer and the bank gets flooded with low-profit depositors. Your best bet is to find a local rewards checking account by using the filters over at DepositAccounts.com. I no longer have any money in any rewards checking account as the benefits are too low for the time and effort of jumping around, especially when I could just do some $500+ credit card bonuses for much more (non-taxable) easy money.

U.S. Savings Bonds

Series I Savings Bonds offer the security of government backing and rates that are linked to inflation. “I Bonds” bought right now will earn 1.76% total for the first six months, and then a variable rate based on ongoing inflation after that. You must hold them for a year, and if you redeem them within 5 years you lose the last 3-months of interest. While the rate is technically unknown, the net rate after a year is quite likely to be higher than most competitive CDs, and you get ongoing inflation protection and well as some other potentially beneficial tax features. More info here.

Series EE Savings Bonds are not indexed to inflation, but are also worth a second look these days as they have a guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently a sad 0.20% APY). Too much risk for an emergency fund for me, but perhaps as a long-term portfolio holding.

I’ve been very happy with my historical purchases of these bonds. For 2012, the annual purchase limit for electronic U.S. savings bonds bought at TreasuryDirect is now $10,000 per series, per person.

Online Savings Accounts and Day-to-day Banking Needs

I chose Ally Bank for my daily banking convenience and emergency fund needs. Why? First, their 5-year rocks as shown above and I have a lot money sitting in those. Second, Ally Interest Checking has a nice combo of features including no minimums, no fees, 24/7 phone and Live Chat customer service, ATM fee rebates everywhere (even at ripoff Las Vegas casinos), and free overdraft transfers from savings. This way, I can keep most of my money in their online savings account, which has remained competitive (currently at 0.84% APY). Check out my Ally Bank Checking account review for an in-depth rundown.

I’ve pretty much stopped jumping between online savings accounts. TIAA Direct was mildly interesting last year with an intro rate of 1.25%, but then they stopped taking new customers and lowered their rates back in line with the crowd at 0.92%. I still have open accounts with Discover Bank, American Express Savings, Capital One 360 (ING Direct), and FNBO Direct, but they’ve all fallen back into the pack with APYs around 0.80-0.90%.

While these are the best rates available, our household cash reserves consists only of Series I savings bonds, Ally 5-year CDs, Ally Checking accounts, and Ally Savings accounts. I’ve tried rewards checking accounts but the rates kept dropping, and I don’t like being locked into a long-term CD with a big early withdrawal penalty even if the rate is slightly higher. You may feel differently.

Comments

  1. One issue that I have run into with banks (both online and bricks n mortar) is that the savings accounts become dormant if you don’t have any activity in them over a certain period of time. This requires a call to reactivate the account. Seems ridiculous that a SAVINGS account should become dormant. Regardless of whether there are better uses for my money (I do have significant amounts in equities but believe the optionality of cash is underrated), is there any way around this?

  2. Have both Ally & Schwab. Schwab is best for consumer friendliness, despite ally commercials boating of their supposed best policies. schwab has everything ally offers plus free stop payments, no fee for going over 6 withdrawal limit on savings account once in a while, free overdrafts transfer without forcing an extra $100 withdrawal on top of what you withdraw (found out the hard way ally does this and now I’ve hit the 6 withdrawal limit, don’t their ads say no hidden bs?)and much better customer service, if only they brought their interestrate back up would be perfect.

  3. I have Ally 5-year CD that’s paying about 3.1%APY… that’s higher than the interest rate of my mortgage…

    Unfortunately the CD is gonna mature in 2 years ~_~

  4. @Erik – Most “no fee no minimum” online banks that I have seen don’t have this issue. ING Direct did close some accounts a while ago when there was both a zero balance and no activity. I haven’t had any activity for over a year in my Discover Bank, American Express Savings, Capital One 360 (ING Direct), and FNBO Direct accounts and nothing has happened. What specific banks made your account dormant?

    @max – Problem is Schwab pays just 0.10% APY, Fidelity 0.07% APY.

    @Peter – I feel your pain, but let’s enjoy it while it lasts. I also have an old PenFed CD paying 5% but I don’t view it as a cash reserve but actually a mortgage offset account as it does pay more than my mortgage interest rate.

  5. Ally made my account dormant after 12 months of no deposits/withdrawals. This caused my linked account (to a bricks and mortar bank) to disappear. So I had to call and get them to reactivate it so I could initiate a transfer. Not a huge deal, but it was the idea of such a practice that bothered me.

  6. @Erik – Thanks for the data point. What you can do is simply set up a free online bank funds transfer of say $2.76 (make it look random?) auto-scheduled every 6 months between your B&M bank and Ally account. To avoid the 6 limit, make them deposits to Ally?

  7. Jonathan, Barclays Bank currently offers 1.0% for savings account and 1.85% for 5-Yr CD. I just opened both accounts with them.

  8. Thanks for entries like these! My main frustration is that I get tired of chasing yield for online savings accounts. I’ve held two Capital One online savings accounts – which used to offer better rates than ING Direct (when they were separate entities), but I’m frustrated that rates keep going down even recently.

    I don’t understand why CD rates and high yield savings rates continue to fall, even though the Fed has held the funds rate at 0-0.25% for years. Are the rates falling because Treasury yields are falling?

    For instance, I opened up an Ally 1-year CD with most of my emergency fund at 1.04% APY. Nothing has radically changed in the money markets, as far as I can tell, but now Ally is only offering 0.89% for the same instrument.

    Perhaps I should take advantage of the 60-day interest withdrawal penalty and sign up for longer-term CDs – instead of trying to build a CD ladder.

  9. also, money markets/sweep accounts are near zero % yield

  10. The chart and your explanation has inspired me. I just swept the remaining half of my High Yield Savings (the part that I’m unlikely to need in the next 12 months) into an Ally 5-year CD.

    It’s amazing the psychology behind our propensity towards loss aversion, even if it is most likely to result in greater gains – especially in a case like this, where the additional risk is very, very small.

  11. I’ve had a Barclay’s online money market acct for several years now. It pays 1%, so why bother with an Everbank 1.25 for just 6 months when i can get 1% month after month after month?

  12. I prepaid 2 years of utility (electric, gas, mobile phone) bills with 5% cash back (US bank Cash+), so I am earning more than 2.5%/yr for that money.

  13. @fern – I agree the 1.25% isn’t especially exciting, but it is the best 6-month effective CD out there. Online savings account rates can and do drop at any time, look at TIAA. Several years? Barclays Bank US has only been around less than year as far as I can recall.

  14. Well, you got me curious, so I looked it up; i opened the Barclay’s acct in August 2012, so it’s been not quite a year. Long enough to know a “good” deal when I see one!

  15. is Money Market FDIC insured?

  16. hope this isn’t a dumb question. =) When you do an early withdrawal on a CD, do you keep the interest up to that point? or do you lose all the interest, and pay the additional penalty? Does that rule apply to all CDs across all banks (or is there a possibility of a sneaky bank putting in the fine print that you won’t get any interest as well as the penalty)?

  17. In Ally’s case, it’s made clear by a line on the account details page showing the “Current Redemption Amount.” This is the amount that’s the principle plus interest accrued, less any early-withdrawal penalties.

    So, the interest does accrue – and provided one keeps the CD funded longer than 60 days, they’ll recover all their principle plus some interest.

  18. @xmasy – money market mutual funds are not FDIC-insured, money market bank accounts from a FDIC-insured bank are.

    @Bucky – Usually, yes you keep the credited interest. (Many people elect to receive the interest each money from their CDs directly each month.) I don’t know of any bank that doesn’t, but I suppose some may only “credit” interest annually and if you don’t quite reach that year and close the CD you may not get the interest.

  19. Thanks, Jonathan, you’ve really opened my eyes to CDs. I used to think that CDs were irrelevant nowadays because 1) you could get just as high rates with money market funds without the early withdrawal penalty 2) the early withdrawal penalties were killers. But your chart (which I verified with my own independent Excel calculations) proved that the 5 year Ally CD (with merely 60 day penalty) is a no-brainer with today’s pitiful near-zero money market rates. All you have to do is hold a 5-year CD (1.58%) for 4.2 months, and you’ll already break even with the Ally savings account interest rate of 0.84%. So I’ll be converting all my cash savings to Ally 5-year CDs (multiple ones so I don’t have to take an early withdrawal hit on the entire amount). It doesn’t make any sense not to!

  20. davidmichael says:

    If you have a large cash bucket for emergency, it makes sense to me to have some cash ($5000) in a money market fund for instant withdrawal and then the rest in I-Bonds. The I-Bonds are secure and provide higher rates than CDs. When the fixed amount comes in, you can cash the old ones out for the new ones. Chasing CDs is a PITA. IMHO, I-Bonds are the answer.

    By the way, in this interest rate environment, even short term bonds lost money during the past two months. Normal bonds are risky for the next few years. There is no loss associated with I-Bonds.

  21. As of today, 9/5/13, I bonds are only paying 1.18%. You can do better with a 5 year CD at State Farm Bank with APY 2%.

    I plan to ladder some 5 year CDs with State Farm, maybe $5,000 each, with about $35,000 in Vanguard IRA money market funds that are now earning a pitiful 0.16%. These are part of my retirement funds and are just sitting around and won’t be touched, so might as well do a little better.

  22. davidmichael says:

    Granted there may be some higher paying CDs today, but I Bonds will be paying more soon (IMHO) as the bond buying tapers off. I suspect we will see an increase for the Nov 1 yield. At least the IBond can be changed annually to accommodate increased yields. You might also consider P2P lending where 9% is not unusual. Check out “Retire by 40″ blog.

  23. FYI it looks like Ally has changed its policy on early redemptions from CDs. For new CDs opened after December of last year, there is a sliding scale starting with 60 months of forfeited interest that goes all the way up to 150 days of forfeited interest for the 5-year CD. You may have already posted this elsewhere, and I missed it, but here are the new terms:

    http://www.ally.com/bank/high-yield-cd/

  24. sigh, like all things that are too good to last…

  25. Yes, the Ally CD early withdrawal penalty was changed in late 2013, it was a bummer although we got a couple months of notice:

    http://www.mymoneyblog.com/all.....hange.html

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