Back to Basics: Simplify and Automate Your Savings

automateLet’s take a step back and focus on some actionable tips to simplify and automate your savings. Think of it as knocking out your New Year’s Resolution in just 10 minutes or less.

New Year’s resolutions fail because willpower is like a muscle. If you keep having to choose the “right thing” that does not provide immediate gratification, your willpower muscle starts to fatigue. Eat the healthy kale thing instead of the nachos? Yes for a few times, but after a month no no no. Take 15% of your paycheck and set it aside? You’ll forget. The key is to take away the decision = no willpower fatigue.

First, consider your paycheck. Is it bi-weekly, semi-monthly, or monthly? Let’s say it is biweekly and you get paid this Friday, January 9th. That means you know you’ll get paid on January 23rd, February 6th, and so on. You just need to schedule a transfer for 15% of your paycheck for each of those days directly into an online savings account. Here are screenshots and tips for some specific providers:

Auto-save with your 401(k) plan.
This allows you to get any company match, grow your money faster with tax advantages, and also takes the money out before it even reaches your paycheck. Our provider is TransAmerica, which like many others now offer an option for annual auto-increases as well. The only frequency option is every pay period.

save_trs

Auto-save with Ally Bank Savings Account.
This is my go-to savings account, and it has the most flexible list of frequency options: weekly, bi-weekly, every 15 days, weekly, every 2 weeks, every 4 weeks, monthly, every 2 months, every 3 months, every 6 months, every year, the first business day of each money, or the last business day of each month. With a competitive interest rate, no minimum opening balance, and no monthly fees, and other features – see my Ally Bank Savings Account Review for details.

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Auto-save with Capital One 360 Savings Account.
Formerly ING Direct, this is the original no minimums, no monthly fee online savings account. The frequency options include weekly, bi-weekly, semi-monthly, monthly, or quarterly. You can even set up special sub-accounts and name them things like “Vacation” or “Next Car”. See my Capital One 360 Savings Account Review for more details.

save_capone360

Auto-save with Vanguard IRA and mutual funds.
The best place for low-cost investing in an IRA. Under “Automatic Investments”, you can schedule investments for mutual funds in either IRA or taxable accounts. You’ll need to have the fund already established with the minimum initial investment. The frequency options include weekly, monthly, bi-weekly, or semi-monthly.

save_vanguard

What if I need the money? Well, if you put in an online savings account, if you really need the money, you can transfer it back. But even transferring back out of your savings account will take a conscious effort, so you’re less likely to do it. You can’t easily withdraw from a 401k or IRA, so you’ll just have to make the commitment.

The key here is to combat laziness. If you like this idea, take action today and you’ll be on autopilot the rest of the year!

Big List of Free Consumer Reports (1/2): See Your Confidential Credit, Banking, and Payday Lending Data

magUpdated for 2015! Since these are available every 12 months, it is a good idea to check these near or around the same time each year.

There are many companies out there that make money by collecting and selling data – your personal data. In the past, it was often difficult if not impossible to see what they were telling prospective lenders, landlords, even employers about you. Under the FCRA and/or FACT Acts, many consumer reporting agencies (CRAs) are now legally required to send you a free copy of your report every 12 months, as well as provide a way to dispute incorrect information. I have split them into two parts:

Some have an online request form, but many require snail mail with proof of identity. You probably won’t want to bother checking all of them (for example if you rarely write checks or use payday loans), but if you’ve experienced any sort of rejection or adverse reaction in these areas the cause might be found inside one of these databases. Keep in mind that you may not have a file with all of these places.

Credit-Related

Experian, Equifax, and TransUnion. The three major credit bureaus track your credit accounts, payment history, and other related information like bankrupts and liens. Free copy of each once every 12 months.

CoreLogic Credco. One of the largest credit-related CRAs and often used by mortgage lenders, your CoreLogic Credco Consumer File can contain: previous homeownership and mortgage info, rental payment history, any reported delinquencies, and other debt obligations like child support. Free copy once every 12 months.

LexisNexis. One of the largest personal information databases that includes public records, real estate transaction and ownership data, lien, judgment, and bankruptcy records, professional license information, and historical addresses on file. Free copy, must mail in form.

Innovis. A supplementary credit report and identity verification provider. Free copy once every 12 months.

IDA, Inc. Per their site, they are a “credit reporting agency that produces credit reports and scores from our repository of consumer information contributed by a wide array of companies including leading financial services organizations, wireless providers, utilities, retailers, auto lenders and many others.” Free copy, must mail in form.

Microbilt and subsidiary Payment Reporting Builds Credit (PRBC). Microbilt is a credit reporting agency, per their site a “leading provider of alternative credit data to businesses that want to offer credit and other financial services to the approximately 110 million underserved and underbanked consumers in the United States.” Free copy once every 12 months.

L2C, Inc. A credit reporting agency, appears focused on the underbanked or unbanked population. Limited further details.

Banking-Related

Chexsystems. A consumer information database used by an estimated 80-90% of all banks to help determine the risk of opening new accounts. Think of it as the banks’ version of a credit bureau. If a person commits check fraud or overdraws their account, it will be listed here. In addition, the simple act of opening or closing a bank account may be recorded in their database. Having a negative ChexSystems record can leave you blacklisted from opening bank accounts at most major banks. Free copy once every 12 months. Must order by phone, mail, or fax.

TeleCheck. Per their site, they provide “industry-leading check acceptance, check processing and risk analytics services to merchants and financial institutions.” One of the major companies that protect businesses and banks from bad checks. Must order by phone or mail.

Certegy Check Services. Per their site, a “check risk management company that provides verification, guarantee and risk analytics to thousands of businesses that choose to accept checks as a form of payment for goods or services.” Clients include check-cashing stores and casinos. Free copy once every 12 months. Must order by phone or mail.

Early Warning Services. A collaboration between a group of big banks including Bank of America, BB&T, Capital One, JPMorgan Chase and Wells Fargo. Provides fraud prevention and risk management in relation to bank accounts and payment transactions. Must order by phone.

Subprime-Related (Payday Lending)

The following companies focus on subprime customers with clients including payday lenders, title loan lenders, rent-to-own stores, and subprime auto loan providers.

Teletrack (affiliated with CoreLogic).

FactorTrust. Free copy once every 12 months.

Clarity Services, Inc. Must mail or fax form.

DataX Ltd. Must mail form.

Reminder: Also see Part 2: Big List of Free Consumer Reports with Your Confidential Housing, Insurance, & Employment Data.

This should serve as a mid-year notice, but I will refresh this post as a reminder around January 1st (that’s when I like to pull all my reports).

Sources: ConsumerFinance.gov, FTC.gov, Wikipedia

Ally Bank Savings Account Review

allyreview_logoI’ve banked with Ally for years (checking, savings, and multiple CDs), but I’ve never done a specific review of their savings account until now. Ally has recently raised their rates to be closer to the rotating list of banks jockeying for top spot.

The Ally Online Savings Account has no minimum balance, no monthly fees, and currently pays 0.99% APY (as of 12.19.14). Their interest rates may not be the absolute highest, but they have consistently been within 0.10% of the temporarily top banks, making it not worthwhile to move my money. (See my rate chaser calculator). Let’s go through the important factors.

User Interface. Below is a screenshot of the main page after logging in (click to enlarge). I can see all of my accounts and their balances at a glance. The overall design is clean and practical (with a good dose of purple).

allyreview_main

Customer Service. Ally Bank differentiates itself with their customer service. First of all, they are available 24/7 at 1-877-247-ALLY (2559). When you use their smartphone app or log into their website, you can see the wait time beforehand. Even better, if you don’t want to call them you can just use their Live Chat feature. I have highlighted these with red arrows on the screenshot above.

Awards. Ally Bank has won “Best Online Bank” from Kiplinger’s Personal Finance magazine in 2014 and “Best Online Bank” from Money Magazine from 2011-2014.

FDIC Insurance. Ally Bank is a member of the Federal Deposit Insurance Corporation, FDIC Certificate #57803. As with other FDIC-insured banks, this means your Ally deposits are insured by the FDIC up to $250,000 per depositor, for each account ownership category.

Funds Transfers. With no physical branches, online savings accounts should have maximum flexibility as they are often secondary accounts (given most megabank checking accounts pay either no interest or a sad 0.01% APY). Ally Bank allows you to link any other external bank account using the standard routing number and account numbers. As long as you initiate the transfer before 7:30 pm Eastern Time, the transfer will take 2 business days. You can link up to 20 different accounts (it used to be unlimited; but other banks limit to 3; I have 7 myself).

So if I initiate a transfer on Monday afternoon by 7:30pm ET, the money will be debited first thing on Tuesday, and credited to the destination account first thing Wednesday. But know that if you initiate on a Saturday, you’ll get the same result. Even bank computers really don’t like working weekends, it seems. Overall, free transfers within 2 business days during the week is about as good as it gets for online banks.

allyreview_funds

The transfer limits are also relatively high. On my accounts, I see that I have a $150,000 daily limit outbound and $250,000 daily limit inbound, with a total monthly limit of $600,000 outbound and $1,000,000 inbound. Keeping in mind that all savings accounts from any bank are limited to six withdrawals per month.

Mobile check deposit. You can use the Ally smartphone app to deposit checks using your smartphone camera. (This is in addition to using your computer scanner and/or free postage-paid deposit envelopes.) I’m not sure if this is the same for everyone, but my deposit limit is $50,000 which is higher than many other electronic deposit programs. I’ve used the app to deposit multiple checks without issue. Screenshot below.

allyreview_echeck1 allyreview_echeck2

Mobile app. Let’s see, other comments about the app (iOS and Android)… you can do all the important stuff – see transactions, transfer funds, deposit checks, pay bills. It can remember your username, but you must type in your password every time. I usually just use my Mint app for checking balances, as that only requires a 4-digit PIN. The overall design is acceptable, and the ATM locator includes places like Safeway stores that offer “cash back with purchase”. (If you have the Ally Checking account, you get free ATM fee rebates so the locator is handy as you can just use the nearest ATM.)

The Stats

  • Current interest rate: 0.99% APY (last checked 12/18/2014)
  • Interest Compounding: accrued daily, compounded daily, credited monthly
  • Minimum to open: $0
  • Minimum requirements to avoid monthly service charge: None
  • Number of external bank account links allowed: Unlimited
  • Routing Number: 124003116

Bottom line. The Ally Online Savings Account is a solid offering with with no monthly fees, no minimum balance requirement, and a historically competitive interest rate. I like that their brand is built around the “no hidden fees” slogan. Additional features like a flexible funds transfer system and solid 24/7 customer service help differentiate themselves from the competition.

You can use this savings account either as a complement to your local bank, but I really like how it works with the Ally Checking account which offers unlimited ATM fee rebates, free online billpay, and the ability to use the savings account as a free overdraft source. Ally also has certificates of deposit which offer competitive rates at times.

Capital One Consumer Bank Black Friday $100 New Account Promo

Cap One 360 Checking Banner

UPDATEThis promotion is now EXPIRED.

Capital One Consumer Bank has a few Black Friday weekend deals including …

This has to be your (or your joint account holder‘s) first 360 Checking Account (including Electric Orange Checking). Additionally, this has to be your (or your joint account holder‘s) first 360 Savings Account (including Orange Savings Accounts).  Good from Black Friday, November 28th at 12am ET to the end of Cyber Monday, December 1st 11:59pm ET.   This is usually the biggest bonus they’ll offer all year.

Cash Reserves & Best Interest Rates Update – November 2014

percentage2Our 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.

Interest rates are still depressingly low, and I haven’t made any changes to how I hold my cash reserves since my last update in June. However, there are still better options out there for cash stuck in a too-big-to-fail megabank savings account paying 0.000001%.

Best Currently Available Interest Rates

If I wasn’t already invested as outlined at the bottom of this post, here are the FDIC-insured or government-backed opportunities that I would be looking into based on my needs.

  • Everbank Yield Pledge Money Market and Interest Checking account both offer 1.40% APY guaranteed (up to $50k each) 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.
  • “Series I” US Savings Bonds offer rates that are linked to inflation. “I Bonds” bought right now will earn 1.48% 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 future rates are unknown, the net rate after a year is still likely to be competitive with top 1-year CD rates. More info here.
  • Rewards checking accounts pay above-average interest rates, but only if you to jump through many hoops. Make a mistake and you’ll forfeit your interest for that month. Rates can also drop quickly, leaving a “bait-and-switch” feeling. If you’re up for it, a recent example is Consumers Credit Union where you can earn up to 5.09% APY on up to a $20k balance, although 3.09% APY is easier to achieve unless you satisfy a long list of requirements. Good news is the rate is guaranteed until August 2015.
  • Certificates of deposit. If you have a large cushion, it’s quite likely to just sit there for years. Why not put some money in longer-term investments where you can still take it out in a true emergency and pay an early withdrawal penalty. Synchrony Bank (formerly GE Capital Retail Bank) is offering a 5-year CD paying 2.30% APY for $25k+ balances (2.25% APY for $2k+) with an early withdrawal penalty of 180 days interest. For example, if you withdraw from this CD after 2 years and pay the penalty, your effective rate earned will still be 1.72%.
  • Willing to lock up your money for 7 years? Tobyhanna Federal Credit Union has a 7-year CD paying 3.04% APY, however the early withdrawal penalty is a full 2 years of interest. More info at DepositAccounts.com.
  • How about two decades!? “Series EE” US Savings Bonds are not indexed to inflation, but 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 0.50% APY). You really want to be sure you’ll keep it for 20 years.

Where’s My Money At?

Here’a quick recap of how I have our cash reserves split up. Keep in mind that most of the rates that I locked in are no longer available, but I did blog about them at the time.

  • Ally Bank Online Savings paying 0.90% APY (as of 11/3/14) which also serves as a no-fee overdraft option to my Ally Interest Checking, that way I can keep a minimal balance in checking. Ally checking also has unlimited ATM fee rebates and no fees. I know there are some savings accounts paying a tiny bit more, but not worth the trouble for less than 0.1% difference on $10,000.
  • Ally Bank CDs earning between 1.84% and 3.09% APY. These are old 5-year CDs with a short 60-day interest penalty. Current Ally CD rate of 11/3/14 is 2.00% APY for 5-Year CD with 150-day early withdrawal penalty.
  • PenFed CDs earning 5% APY. Long gone, although earlier this year PenFed did offer 5-year CDs at 3% APY (no longer available). Current rates are only so-so.
  • I also bought several US savings bonds that I now consider part of my retirement portfolio as opposed to cash reserves, as I don’t think I’ll ever want to cash them in before full maturity. More info below.

All rates are believed current as of writing, 11/3/14.

Pentagon Federal Credit Union Free FICO Credit Score (NextGen)

Pentagon Federal Credit Union (PenFed) now offers a free credit score to select members. It may be offered only to members with a credit account with them (auto, checking overdraft, mortgage, etc.). I was offered the free FICO score and only have their Thrifty Credit Service which is just a $500 line of credit in case of an overdraft from my checking account. You can find access via a banner on the main page after logging in:

penfedfico1

The score formula is called the FICO NextGen, which has a range of 150-950 as opposed to the traditional FICO range of 300-850. FICO tried to roll out this new “improved” score several years ago but it never really took off. So while this is a “FICO score”, the number may not be as easy to understand. However, PenFed does state that this score is the actual score that they use when making credit decisions. Also included are the top two “key factors” affecting your score:

penfedfico2

As usual, some of the advice these services offer don’t make much sense. So what if I don’t have an outstanding auto or student loan? I pay cash for my cars and worked hard to paid off my student loans. Why would I voluntarily go into debt again just to bump up my credit score a few ticks? They should know that my credit is already good enough that I’ve never had a problem getting any sort of loan product.

Capital One 360 Financial Independence Day Promo 2014

13045000Capital One 360 is running their annual Financial Independence Day promotion, with what is traditionally the best bonus of the year for their 360 Savings and 360 Checking accounts. (Formerly known as ING Direct.) These online bank accounts offer no monthly fees and no minimum balance requirements, all with a decent interest rate. As a result, the savings account makes a great “online piggy bank” where you can make free transfers from your existing checking accounts from any bank into the 360 Savings account on a regular basis. Promo details:

360 Savings $76 Bonus

  • Grab $76 when you open a 360 Savings® account.
  • This has to be the primary account holder’s first 360 Savings account and it needs a $500 minimum deposit.
  • The bonus starts earning interest on day 1, but you can’t take it out for at least 30 days.

360 Checking $100 Bonus

  • Earn $100 when you open a 360 Checking® account. Sign up for fee-free 360 Checking®, make 5 Debit Card purchases or 5 mobile deposits with CheckMateSM within 45 days and snag a cool $100 on day 50.
  • This has to be your and your joint account holder’s (if you have one) first 360 Checking account.
  • Open 360 Checking from June 30th – July 3rd and make a total of 5 Debit Card purchases or 5 CheckMateSM deposits or any combination of the two within 45 days.
  • Your $100 bonus will be automatically deposited into your account on day 50.

Applying for Multiple Bank Accounts: Can You Apply For Too Many?

multibanksUpdated. If you open multiple bank accounts in order to take advantage of higher interest rates or sign-up bonuses, you may be concerned about any potential consequences from all that activity. In my experience, there are two main factors to be aware of when you open a bank account:

Banks pulling your ChexSystems report. ChexSystems is a consumer information database used by an estimated 80-90% of all banks to help determine the risk of opening new accounts. Think of it as the bank’s version of a credit bureau. If a person commits check fraud or leaves their account with a negative balance, it will be listed here. In addition, the simple act of opening or closing a bank account may be recorded in their database.

One thing that may raise a red flag is opening up several bank accounts in a very short period of time. This is because of the connection of multiple bank accounts to a form of fraud called ‘check kiting‘. Kiting usually involves sending several checks between different banks to create an temporary surplus of money from the bank’s funds availability policies, and then cashing that out before all the checks fully clear. In the end, one of the banks is left holding the bag.

But for the most part, as long as you haven’t left any accounts in bad standing you shouldn’t run into any problems with opening up new bank accounts. I’ve opened up accounts at over 30 different banks over the last several years, sometimes two or three in one week, and have never been rejected by any of them. However, having a negative ChexSystems record can leave you blacklisted from all the major banks (even if you make $100k a year). Information generally stays on your ChexSystems report for five (5) years.

As with credit reports, you can get a free copy of your ChexSystems report once every 12 months.

Banks pulling your credit report. Yes, it is legal for banks to pull your credit report. According to the consumer help site HelpWithMyBank.gov, per the Fair Credit Reporting Act, a bank can obtain a consumer report for any legitimate business need, including the following:

  • credit transactions
  • review or collection of an account
  • opening a deposit or savings account
  • underwriting of insurance

There are a couple reasons they do so. First, this is another way for them to identify you and measure the risk of giving you a new account. Second, they may use this information to market other financial products like credit cards or home equity loans to you.

I’ve talked about the difference between hard and soft credit pulls. Usually, bank will just perform a soft credit check, which doesn’t affect your credit score. (All those “pre-approved” credit card applications in the mail are from soft credit checks.) However, some banks also perform hard credit checks, which do hurt your credit score slightly. Some banks do offer a line of credit in lieu of overdraft protection, but in general there doesn’t appear to be a rhyme or reason as to which ones do hard pull and which ones don’t. I personally suspect that it may just be unintentional and they don’t know the difference. (More importantly, most people don’t know the difference so they don’t really get any pushback.)

You can get a free copy of each of your credit reports (which lists all your hard pulls and which financial instituation did the pull) once every 12 months at AnnualCreditReport.com.

To summarize, I usually try to find out first if the bank will perform a hard credit check based on the reported experiences of other consumers online. This isn’t an exact science, as the banks can often change their practices. If it is likely they will, then I want to make sure that I am getting enough value from the new account because I know I can already trade a hard pull for $200-$500 of value from a credit card application. Otherwise, I don’t really worry about the number of bank accounts I have, although I do close them as soon as I don’t foresee any future benefit.

Cash Reserves & Best Interest Rates Update – June 2014

percentageOur 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.

Interest rates are still depressingly low, and I haven’t made any changes to how I hold my cash reserves in the past 12 months. However, I figured an update is in order as some of you may not be aware of the many options besides your too-big-to-fail megabank savings account paying 0.000001%.

My Cash Reserves
First, a quick recap of how I have our cash reserves split up. Keep in mind that most of the rates that I locked in are no longer available, but I did blog about them at the time.

  • Ally Bank Online Saving (0.87% APY of 6/24/14) as a no-fee overdraft backup to my Ally Interest Checking (0.10% APY on balances under $15k, 0.60% APY over $15k of 6/24/14), that way I can keep minimal balance in checking. Ally checking also has unlimited ATM fee rebates and no fees. I know there are some savings accounts paying a tiny bit more, but not worth the trouble for less than 0.1% difference on $10,000.
  • Ally Bank CDs earning between 1.84% and 3.09% APY. These are old 5-year CDs with a short 60-day interest penalty. Current CD rate of 6/21/14 is 1.60% APY with 150-day early withdrawal penalty.
  • PenFed CDs earning 5% APY. Long gone, although earlier this year PenFed did offer 5-year CDs at 3% APY (no longer available). Current rates are yawn-tastic.
  • I also have several US savings bonds that I now consider part of my retirement portfolio as opposed to cash reserves, as I don’t think I’ll ever want to cash them in before full maturity. More info below.

Best Currently Available Interest Rates
If I wasn’t already invested as outlined above, here are the FDIC-insured or government-backed opportunities that I would be looking into based on my needs.

  • Everbank Yield Pledge Money Market and Everbank Interest Checking account both offer 1.40% APY guaranteed (up to $50k each) 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.
  • “Series I” US Savings Bonds offer rates that are linked to inflation. “I Bonds” bought right now will earn 1.94% 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 future rates are unknown, the net rate after a year is likely to be higher than any 1-year CD. More info here.
  • Rewards checking accounts pay above-average interest rates, but only if you to jump through many hoops. Make a mistake and you’ll forfeit your interest for that month. Rates can also drop quickly, leaving a “bait-and-switch” feeling. If you’re up for it, a recent example is Consumers Credit Union where you can earn up to 5.09% APY on up to a $10k balance, although 3.09% APY is probably a more reasonable expectation (there are a lot of hoops).
  • Certificates of deposit. If you have a large cushion, it’s quite likely to just sit there for years. Why not put some money in longer-term investments where you can still take it out in a true emergency and pay an early withdrawal penalty. Synchrony Bank (formerly GE Capital Retail Bank) is offering a 5-year CD paying 2.30% APY for $25k+ balances (2.25% APY for $2k+) with an early withdrawal penalty of 180 days interest.
  • Willing to lock up your money for even longer? Tobyhanna Federal Credit Union has a 7-year CD paying 3.04% APY, however the early withdrawal penalty is a full 2 years of interest. More info here.
  • Even looooonger? “Series EE” US Savings Bonds are not indexed to inflation, but 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 0.50% APY). You really want to be sure you’ll keep it for 20 years.

All rates are believed current as of writing, 6/24/14.

Citibank Checking Billpay and Mobile Check Deposit $100 Promotion

Citibank is running a $100 bonus promotion good for existing checking account customers. You have to first enroll in the offer by 7/31/14, and then you can earn $10 per month for doing each of the following activities from 6/1/14-12/31/14:

  • Online bill payment
  • Mobile check deposit
  • Outgoing Popmoney person-to-person money transfer

So you could technically get $30 a month, but the total possible bonus over the entire 7 month period is only $100. I don’t think this promotion is juicy enough to warrant opening a new Citi checking account, but it’s a pretty easy $100 if you already have one. Bonuses arrive within 60 days after a month with qualifying activity, and will only get reported on a 1099-MISC if you earn over $600 in miscellaneous taxable income from Citibank in a year.

Cash Is Still King, But Most People Prefer Debit Cards Over Credit Cards

The Federal Reserve recently released a report about about consumer payments [pdf], and it had some interesting results (at least to me). Via Business Insider. Here are the distilled highlights.

Cash is still the most frequently used form of payment, as measured by number of transactions. This is partly due to the fact that cash totally dominates for payments less than $10. In terms of value, electronic payments (online billpay and ACH payments using bank account numbers) have the largest share.

realdebitcards5

This next chart shows that debit card use is actually growing faster than any other form of payment:

realdebitcards6

Overall, debit cards are also the most preferred form of payment… but it does vary with income. 55% of consumers with household incomes less than $25,000 per year prefer cash over anything else, while 66% of households making more than $200,000 per year prefer credit cards over anything else.

realdebitcards4

People seem to have an either/or relationship with debit cards and credit cards. You either use one or the other predominantly.

realdebitcards3

Initially, I was surprised by the popularity of debit cards. (I prefer credit cards and am one of those people who haven’t used a debit card in years.) My hunch is that people think of debit cards as the closest thing to electronic cash. The money gets zapped out of your checking account and your balance decreases instantly. As long as you decline overdraft “protection”, if you hit zero your purchase will be declined. I admit it does have the appeal of simplicity.

Although I treat my credit card purchases the same as cash and always pay in full each month, credit cards do come with more complexity and the knowledge that the credit card company is lying in wait in case you feel like taking on a little debt. But in return I earn cash back rewards, get better consumer protection against fraud, and enough sign-up bonuses to fly me around the world once in a while.

Everbank 5 Year MarketSafe Treasury CD Review – FDIC Insured Principal, Rising Rate Participation

marketsafe2Interest rates remain very low, but at the same time we are constantly being warned that they could spike up soon. What is a conservative investor to do?

Everbank’s lineup of MarketSafe CDs are a new wrinkle on FDIC-insured bank CDs that try to take advantage of these current low interest rates. They are basically a hedged bet on something like currencies, precious metals, or commodities. If things don’t work out, the principal you put in is protected with FDIC insurance so you’ll always get that back, just with no interest in the worst case. If your selected market bet does pan out, you’ll get an interest payment based on that upside.

Their newest product is the 5-yr MarketSafe Treasury CD which bets on rising interest rates. I don’t pay much attention to gold or currency prices, but interest rates are easier to understand. Here’s the pitch:

With this latest MarketSafe CD, seek 3.3 times any upside growth in the 10-year Treasury yield during the CD term.3 Full protection of your deposited principal comes standard.1 Act by June 11, 2014 to take advantage.

Sound intriguing, but as usual let’s dig into the details.

The CD has a term of 5 years. You must fund it by 6/11/2014 and the maturity date is 6/21/2019 where you’ll get your principal plus any interest accrued (“market upside payment”). You can’t make any early withdrawals (well, technically you can but you lose the principal protection and are subject to penalties). The minimum opening deposit is $1,500. No monthly or account fees. Available for IRAs.

The market upside payment is based on the following formula using the 10-Year US Treasury yield:

(yield at maturity - initial yield) x 3.3 x deposited principal

Comments:

  • While the formula multiplies the rate difference by 3.3, this includes all the interest you’ll get for 5 years. As an example, if you had a 5-year CD paying 2% annually, that’s a 10.4% total return at the end of 5 years. (You can find a 5-year CD at 2.25% APY at GE Capital Retail Bank).
  • The current 10-year Treasury yield is roughly 2.6% (this could change by issue date). If you want a 10% return after 5 years from this MarketSafe CD, 10-year yields would have to rise by 3% to 5.6% in June 2019.
  • If the 10-year Treasury yield stays constant or drops between the initial date and maturity date, you will only get back your original principal.

I won’t make a rate prediction because I have no idea where rates are headed. Here’s a historical chart of the 10-year Treasury yield over the last 20 years (FRED):

fred10ust20yr

The last time the 10-year yield was near 5.5% was around 2002. Rates would have to go higher than that to beat a top 5-year traditional CD. However, keep in mind that with this product you are getting both upside potential and principal protection. In exchange for such risk reduction, it can’t be a slam dunk. If rates do rise up to say 5.5%, then the people who actually bought 10-year bonds today would be looking at a significant loss of principal.