Best Interest Rates on Cash – January 2018

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Short-term interest rates are rising. Megabanks make billions by pay you nothing for your idle cash. Here is my monthly roundup of the best safe rates available, roughly sorted from shortest to longest maturities. Check out my Ultimate Rate-Chaser Calculator to get an idea of how much additional interest you’d earn if you switched over. Rates listed are available to everyone nationwide. Rates checked as of 1/7/18.

High-yield savings accounts
While the huge brick-and-mortar banks rarely offer good yields, there are a number of online savings accounts offering much higher rates. Keep in mind that with savings accounts, the interest rates can change at any time.

  • DollarSavingsDirect at 1.60% APY, CIT Bank at 1.55% APY, both with no minimum balance requirement. SalemFiveDirect 1.50% APY, Synchrony Bank 1.45% APY, GS Bank 1.40% APY.
  • I currently keep my “hub” account at Ally Bank Savings + Checking combo due to their history of competitive rates, 1-day external bank transfers, and overall user experience. I then move money elsewhere if the rate is significantly higher (and preferably locked in via CD rate). The free overdraft transfers from savings allows to me to keep my checking balance at a minimum. Ally Savings is now lagging a bit at 1.25% APY.

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, you should know that money market and short-term Treasury rates have been rising. The following money market and ultra-short bond funds are not FDIC-insured, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 1.38% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund, which has an SEC yield of 1.23%. You can manually move the money over to Prime if you meet the $3,000 minimum investment.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 1.83% SEC Yield ($3,000 min) and 1.93% SEC Yield ($50,000 min). The average duration is 1 year.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 1.68% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 1.81% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. More info here.

Short-term guaranteed rates (1 year and under)
I am often asked what to do with a big wad of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple. If not a savings account, then put it in a short-term CD under the FDIC limits until you have a plan.

  • CIT Bank 11-Month No-Penalty CD is at 1.55% APY with a $1,000 minimum deposit and no withdrawal penalty seven days or later after funds have been received. The lack of early withdrawal penalty means that your interest rate can never go down for 11 months, but you can always jump ship if rates rise. Full review. You can open multiple CDs in smaller increments if you want more flexibility.
  • Ally Bank No-Penalty 11-Month CD is paying 1.60% APY for $25,000+ balances and 1.25% APY for $5,000+ balances. Similar product, higher rate at the moment, higher balance requirement. Ally is a full-featured bank with checking/savings/etc.
  • Synchrony Bank has a 12-month CD is at 2.00% APY with a $2,000 minimum deposit. (Ally Bank had a similar rate that ended on 1/2/18, so I don’t know how long the Synchrony rate will last either.)

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between November 2017 and April 2018 will earn a 2.58% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. At the very minimum, the total yield after 12 months will be 1.29% with additional upside potential. More info here.
  • In mid-April 2018, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). The offers also tend to disappear with little notice. Some folks don’t mind the extra work and attention required, while others do.

  • Insight Card is one of the best remaining cards with 5% APY on up to $5,000 as of this writing. Fees to avoid include the $1 per purchase fee, $2.50 for each ATM withdrawal, and the $3.95 inactivity fee if there is no activity within 90 days. If you can navigate it carefully (basically only use ACH transfers and keep up your activity regularly) you can still end up with more interest than other options. Earning 4% extra interest on $5,000 is $200 a year.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with some risk. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop quickly, leaving a “bait-and-switch” feeling. But the rates can be high while they last.

  • Consumers Credit Union offers up to 4.59% APY on up to a $20k balance, although getting 3.09% APY on a $10k balance has a much shorter list of requirements. The 4.59% APY requires you to apply for a credit card through them (other credit cards offer $500+ in sign-up bonuses). Keep your 12 debit purchases small as well, as for every $500 in monthly purchases you may be losing out on 2% cashback (or $10 a month after-tax). Find a local rewards checking account at DepositAccounts.
  • Note: Northpointe Bank, mentioned previously, no longer has their Rewards Checking account on their website and is not accepting new applications. Unclear how long existing accountholders will be grandfathered. That’s just how it goes with these types of accounts.

Certificates of deposit (greater than 1 year)
You might have larger balances, either because you are using CDs instead of bonds or you simply want a large cash reserves. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider a custom CD ladder of different maturity lengths such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account.

  • Advancial Federal Credit Union has their 18-month CD at 2.05% APY ($50k min) and a 24-month CD at 2.14% APY ($50k min). The early withdrawal penalty is 180 days of interest. Anyone can join with a $5 membership fee to the Connex Professional Network.
  • Ally Bank has a 5-year CD at 2.25% APY (no minimum) with a relatively short 150-day early withdrawal penalty and no credit union membership hoops. For example, if you closed this CD after 18-months you’d still get an 1.64% effective APY even after accounting for the penalty.
  • Northern Bank Direct has a 4-year CD at 2.51% APY with a $500 minimum. I had to mention this top rate, but watch out for the huge early withdrawal penalty of 3-years of interest! Hanscom Federal Credit Union still has their 4-year Share Certificate at 2.50% APY (180-day early withdrawal penalty) if you also have Premier Checking (no monthly fee if you keep $6,000 in total balances or $2,000 in checking). HFCU also offers a 3% APY CU Thrive “starter” savings account with balance caps. HFCU membership is open to active/retired military or anyone who makes a one-time $35 donation to the Nashua River Watershed Association.
  • United States Senate Federal Credit Union has a 60-Month Share Certificate at 2.76% APY ($60,000+), 2.70% APY ($20,000+), and 2.63% APY ($1,000+). Anyone can join this credit union via partner organization American Consumer Council for a one-time $10 membership fee. (ACC lets you become eligible for multiple credit unions.)

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve. (The yield curve has been flattening in recent months.)

  • Willing to lock up your money for 10+ years? You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer the same FDIC-insurance. As of this writing, Vanguard is showing a 10-year non-callable CD at 2.75% APY (Watch out for higher rates from callable CDs from Fidelity.) Unfortunately, currently CD rates do not rise much higher even as you extend beyond a 5-year maturity.
  • How about two decades? Series EE 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 0.10% rate). I view this as a huge early withdrawal penalty, so I avoid it. You could also view it as long-term bond and thus a hedge against deflation, but only if you can hold on for 20 years.

All rates were checked as of 1/7/18.


Premier High Yield Savings

Best Interest Rates on Cash – December 2017

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Short-term interest rates are rising. Don’t let a megabank pay you nothing for your idle cash. Here is my monthly roundup of the best safe rates available, roughly sorted from shortest to longest maturities. You could also use this information to make a bank CD ladder to replace bonds. I focus on rates that are nationally available to everyone (not restricted to certain geographic areas or specific groups). Rates checked as of 12/1/17.

High-yield savings accounts
While the huge brick-and-mortar banks rarely offer good yields, there are many online savings accounts offering competitive rates clustered around 1.1%-1.3% APY. Keep in mind that with savings accounts, the interest rates can change at any time.

  • Top rates: Incredible Bank at 1.55% APY (minimum $25,000). DollarSavingsDirect, SalemFiveDirect, and Redneck Bank/All America Bank (max balance $35k) all paying 1.50% APY.
  • More rates from banks with solid history of competitive rates: CIT Bank at 1.35% APY up to $250k. Synchrony Bank and GS Bank are at 1.30% APY.
  • I’ve experienced the “bait-and-switch” of moving to a new savings account only to have the rate lowered quickly afterward. Until the rate difference is huge, I’m sticking with a Ally Bank Savings + Checking combo due to their history of competitive rates (including CDs), 1-day interbank transfers, and overall user experience. (I will jump on CDs as the rate is locked in.) I also like the free overdraft transfers from savings that let’s me keep my checking balance at a minimum. Ally Savings is at 1.25% APY.

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, you should know that money market and short-term Treasury rates have been rising. It may be worth the effort to move your idle cash into a higher-yielding money market fund or ultrashort-term bond ETF. The following bond funds are not FDIC-insured, but if you want to keep “standby money” in your brokerage account and have cheap/free commissions, it may be worth a look.

  • Vanguard Prime Money Market Fund currently pays an 1.20% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund, which has an SEC yield of 1.07%. You can manually move the money over to Prime if you meet the $3,000 minimum investment.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 1.71% SEC Yield ($3,000 min) and 1.82% SEC Yield ($50,000 min). The average duration is 1 year.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 1.59% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 1.68% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. More info here.

Short-term guaranteed rates (1 year and under)
I am often asked what to do with a big wad of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My standard advice is to keep things simple. If not a savings account, then put it in a short-term CD under the FDIC limits until you have a plan.

  • CIT Bank 11-Month No-Penalty CD is at 1.55% APY with a $1,000 minimum deposit and no withdrawal penalty seven days or later after funds have been received. The lack of early withdrawal penalty means that your interest rate can never go down for 11 months, but you can always jump ship if rates rise. You can even jump ship to another 11-month CD (details).
  • Ally Bank No-Penalty 11-Month CD is paying 1.50% APY for $25,000+ balances and 1.25% APY for $5,000+ balances. If you want a full-featured bank with checking/savings/etc.
  • GS Bank has a 12-month CD is at 1.65% APY with a low $500 minimum. For sizeable balances, Advancial Federal Credit Union has a 6-month CD at 1.75% APY ($50k min) and a 12-month CD at 1.90% APY ($50k min). If you don’t otherwise qualify, you can join with a $5 fee to Connex Professional Network and maintaining $5 in a Share savings account.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between November 2017 and April 2018 will earn a 2.58% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. At the very minimum, the total yield after 12 months will be 1.29% with additional upside potential. More info here.
  • In mid-April 2018, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). The other catch is that these good features may be killed off without much notice. My NetSpend card now only has an eligible balance up to $1,000.

  • Insight Card is one of the best remaining cards with 5% APY on up to $5,000 as of this writing. Fees to avoid include the $1 per purchase fee, $2.50 for each ATM withdrawal, and the $3.95 inactivity fee if there is no activity within 90 days. If you can navigate it carefully (basically only use ACH transfers and keep up your activity regularly) you can still end up with more interest than other options. Earning 4% extra interest on $5,000 is $200 a year.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with some risk. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Rates can also drop quickly, leaving a “bait-and-switch” feeling. But the rates can be high while they last.

  • Consumers Credit Union offers up to 4.59% APY on up to a $20k balance, although getting 3.09% APY on a $10k balance has a much shorter list of requirements. The 4.59% APY requires you to apply for a credit card through them (other credit cards offer $500+ in sign-up bonuses). Keep your 12 debit purchases small as well, as for every $500 in monthly purchases you may be losing out on 2% cashback (or $10 a month after-tax). Find a local rewards checking account at DepositAccounts.
  • Note: Northpointe Bank, mentioned previously, no longer has their Rewards Checking account on their website and is not accepting new applications. Unclear how long existing accountholders will be grandfathered. That’s just how it goes with these types of accounts.

Certificates of deposit (greater than 1 year)
You might have larger balances, either because you are using CDs instead of bonds or you simply want a large cash cushion. Buying finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider a custom CD ladder of different maturity lengths such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account.

  • Advancial Federal Credit Union (see above) has their 18-month CD at 2.01% APY ($50k min) and a 24-month CD at 2.10% APY ($50k min). The early withdrawal penalty is 180 days of interest.
  • Ally Bank has a 5-year CD at 2.25% APY (no minimum) with a relatively short 150-day early withdrawal penalty and no credit union membership hoops. For example, if you closed this CD after 18-months you’d still get an 1.64% effective APY even after accounting for the penalty.
  • Hanscom Federal Credit Union is offering a 4-year Share Certificate at 2.50% APY (180-day early withdrawal penalty) if you also have Premier Checking (no monthly fee if you keep $6,000 in total balances or $2,000 in checking). HFCU also offers a 3% APY CU Thrive “starter” savings account with balance caps. HFCU membership is open to active/retired military or anyone who makes a one-time $35 donation to the Nashua River Watershed Association.
  • Mountain America Credit Union has a 5-year Term Deposit CD at 2.80% APY ($500 minimum) with a 365-day early withdrawal penalty. They also offer the same rate on a “Term Deposit Plus” certificate which allows you to add more money later, but also requires a monthly $10 auto-deposit. Anyone can join this credit union via partner organization American Consumer Council for a one-time $5 fee.

Longer-term Instruments
I’d use these with caution, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10+ years? You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer the same FDIC-insurance. As of this writing, Vanguard is showing a 10-year non-callable CD at 2.65% APY (Watch out for higher rates from callable CDs from Fidelity.) Unfortunately, current long-term CD rates do not rise much higher even as you extend beyond a 5-year maturity.
  • How about two decades!? Series EE 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 0.10% rate). You could view as a huge early withdrawal penalty. You could also view it as long-term bond and thus a hedge against deflation, but only if you can hold on for 20 years. Too long for me.

All rates were checked as of 12/1/17.


Premier High Yield Savings

Best Interest Rates on Cash – October 2017

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Interest rates are slowly waking up from their multi-year slumber. Don’t let a megabank pay you 0.01% APY or less for your idle cash. Here is my monthly roundup of the best safe rates available, roughly sorted from shortest to longest maturities. I focus on rates that are nationally available to everyone (not restricted to certain geographic areas or specific groups). Rates checked as of 10/2/17.

High-yield savings accounts
While the huge brick-and-mortar banks rarely offer good yields, there are many online savings accounts offering competitive rates clustered around 1.0%-1.2% APY. Remember that with savings accounts, the interest rates can change at any time.

  • The Mega Money Market accounts of both Redneck Bank and All America Bank (they are affiliated) are paying 1.50% APY on balances up to $35,000. Note that amounts over $35,000 earn only 0.50% APY.
  • Other sample top rates: DollarSavingsDirect at 1.40% APY, CIT Bank at 1.35% APY up to $250k, Synchrony Bank at 1.30% APY, Goldman Bank at 1.20% APY, and UFB Direct at 1.41% APY ($5k min).
  • I’ve experienced the “bait-and-switch” of moving to a new bank only to have the rate lowered quickly afterward. Until the rate difference is huge, I’m sticking with a Ally Bank Savings + Checking combo due to their history of competitive rates (including CDs), 1-day interbank transfers, and a overall user experience. I also like the free overdraft transfers from savings that let’s me keep my checking balance at a minimum. Ally Savings is at 1.20% APY.

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, you should know that money market and short-term Treasury rates have inched upwards. It may be worth the effort to move your money into a higher-yielding money market fund or ultrashort-term bond ETF.

  • The Vanguard Prime Money Market Fund currently pays an 1.12% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund, which has an SEC yield of 0.98%. You can manually move the money over to Prime if you meet the $3,000 minimum investment.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 1.46% SEC Yield ($3,000 min) and 1.57% SEC Yield ($50,000 min). The current average effective duration is 1.0 years.
  • The following bond ETFs are not FDIC-insured, but if you want to keep “standby money” in your brokerage account and have cheap/free trades, it may be worth a look. The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 1.58% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 1.60% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. More info here.

Short-term guaranteed rates (1 year and under)
I am often asked what to do with a big wad of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My standard advice is to keep things simple. If not a savings account, then put it in a short-term CD under the FDIC limits until you have a plan.

  • Ally Bank No-Penalty 11-Month CD is paying 1.50% APY for $25,000+ balances and 1.25% APY for $5,000+ balances. The CIT Bank 11-Month No-Penalty CD is at 1.45% APY with only a $1,000 minimum deposit and no withdrawal penalty seven days or later after funds have been received. The lack of early withdrawal penalty means that your interest rate can never go down for 11 months, but you can always jump ship if rates rise.
  • Advancial Federal Credit Union has a 6-month CD at 1.63% APY ($50k min) and a 12-month CD at 1.78% APY ($50k min). If you don’t otherwise qualify, you can join with a $5 fee to Connex Professional Network and maintaining $5 in a Share savings account. Via DepositAccounts.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between May and October 2017 will earn a 1.96% rate for the first six months, and then a variable rate based on ongoing inflation after that. While that next 6-month rate is currently unknown, at the very minimum the total yield after 12 months will around 1% with additional upside potential. More info here.
  • In mid-October, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). The other catch is that these good features may be killed off without much notice. My NetSpend card now only has an eligible balance up to $1,000.

  • Insight Card is one of the best remaining cards with 5% APY on up to $5,000 as of this writing. Fees to avoid include the $1 per purchase fee, $2.50 for each ATM withdrawal, and the $3.95 inactivity fee if there is no activity within 90 days. If you can navigate it carefully (basically only use ACH transfers and keep up your activity regularly) you can still end up with more interest than other options. Earning 4% extra interest on $5,000 is $200 a year.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with some risk. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Rates can also drop quickly, leaving a “bait-and-switch” feeling. But the rates can be high while they last.

  • Northpointe Bank has Rewards Checking at 5% APY on up to $10k. The requirements are (1) 15 debit card purchases per month (in-person or online), (2) enrolling in e-statements, and (3) a monthly direct deposit or automatic withdrawal of $100 or more. ATM fees are rebated up to $10 per month.

Certificates of deposit (greater than 1 year)
You might have larger balances, either because you are using CDs instead of bonds or you simply want a large cash cushion. Buying finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider a custom CD ladder of different maturity lengths such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account.

  • Advancial Federal Credit Union (see above) has increased their rates a bit since last month, with their 18-month CD at 1.96% APY ($50k min) and a 24-month CD at 2.04% APY ($50k min). The early withdrawal penalty is 180 days of interest.
  • Ally Bank also has a 5-year CD at 2.25% APY (no minimum) with a relatively short 150-day early withdrawal penalty and no credit union membership hoops. For example, if you closed this CD after 18-months you’d still get an 1.64% effective APY even after accounting for the penalty.
  • Hanscom Federal Credit Union is offering a 4-year Share Certificate at 2.50% APY (180-day early withdrawal penalty) if you also have Premier Checking (no monthly fee if you keep $6,000 in total balances or $2,000 in checking). HFCU also offers a 3% APY CU Thrive “starter” savings account with balance caps. HFCU membership is open to active/retired military or anyone who makes a one-time $35 donation to the Nashua River Watershed Association.
  • Mountain America Credit Union has a 5-year Share Certificate rate at 2.60% APY ($5 minimum) with a 365-day early withdrawal penalty. Anyone can join this credit union via partner organization American Consumer Council for a one-time $5 fee.

Longer-term Instruments
I’d use these with caution, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10+ years? You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer the same FDIC-insurance. As of this writing, Vanguard is showing a 10-year non-callable CD at 2.65% APY (Watch out for higher rates from callable CDs.) Unfortunately, current long-term CD rates do not rise much higher even as you extend beyond a 5-year maturity.
  • How about two decades!? Series EE 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 0.10% rate). You could view as a huge early withdrawal penalty. You could also view it as long-term bond and thus a hedge against deflation, but only if you can hold on for 20 years. Too long for me.

All rates were checked as of 10/2/17.


Premier High Yield Savings

Treasury Direct Review: Electronic Savings Bond Security Concerns

Despite the Treasury’s obvious dislike for the small investor, Series I Savings Bonds still offer a relatively good interest rate. As of January 1st, 2012, you will no longer be able to buy paper savings bonds other than a small window using your tax refund. The only option left is buying electronic savings bonds via TreasuryDirect.gov. This brings me to the following reader question:

Was just reading Mel Lindauer’s comments in the Bogleheads forum about I-Bonds and the trouble with Treasury Direct. Seems a great many folks hate the system to the point that they would rather not use it. 2012 is/was to be the year that I first began purchased I-Bonds, having finally got to the point of maxing out all other tax deferred and tax free methods. Now I am not so sure…what is your experience with TD?

First, let’s get to what I see as the main reason why most people choose not to use the online service at TreasuryDirect (TD). TD is not a bank and does not fall under Regulation E and the Electronic Fund Transfer Act that establishes consumer protections for loss or theft of money from your account.

If your paper savings bonds are stolen or lost, the Treasury has a process in place to reclaim your bonds. However, if somehow your electronic savings bonds were stolen, you would stuck with the loss with no liability from TD. It doesn’t seem to make sense, but it’s true.

So what do you do? The easiest thing to do is not use TreasuryDirect. But it remains a good investment, so in my case I looked into what security measures were in place to prevent such theft. In November 2011, TD instituted some security changes to their login process. What would a thief have to do in order to cash in your savings bonds?

  1. They need your account number, which is more like Z-12345678 as opposed to johnsmith.
  2. When you login with a new computer, a one-time passcode will be sent to your e-mail address. So, they would need to have access to your e-mail address as well. You can choose to register your computer for future visits if you like, but it would seem safer not to do so. I don’t log into TD very often so my cookie expires anyway by the time I log in again. This means a unique code is sent every single time I log in.
  3. They would also need your account password. I would hope your e-mail password and your TreasuryDirect password are different. In any case, it’s harder for viruses or keylogger programs to record your password because you must enter it using a virtual keyboard (unless you circumvent it by disabling Javascript).
  4. Now, at this point they have online access to your account and can see your balances. But to cash out a bond, first you must answer a security question (mom’s maiden name, etc.). More importantly, you can only cash out a bond to a linked bank account. So the thief would need access to your bank account (…which is protected by Regulation E mentioned above!)
  5. Alternately, they would need to send in a paper form adding an alternate bank account under their control. However, the name on the bank account must match the name on the TD account, and the form requires a Medallion Signature Guarantee where a third party checks official ID for identity verification. The TD website itself has improved over the years so that any small change (bank addition, profile change) results in a e-mail notice.

Personally, I deemed it exceedingly unlikely for an actual theft to occur and made the decision to go ahead and use the website. My holdings there are significant, but under 5% of total net worth. I know that others have also had technical issues with accessing their account, but I have not experienced anything like that. In the end, TreasuryDirect definitely has its flaws, and I would not fault someone for not using it as a result. You have to weight the risks and benefits for yourself.

TreasuryDirect.gov Security Login Changes 2011

TreasuryDirect.gov is the official US Treasury website that allows individuals to directly buy securities online, including savings bonds and Treasury bonds. The problem is that they don’t want to take any responsibility for unauthorized access to your account, including reported fraud and theft, which actually makes them less consumer-friendly than even those evil megabanks. In the past, they figured the problem would be best solved with a series of clunky security measures.

I’m not sure why, but they have now streamlined the login process to be more similar to banking industry standards. On November 6th, they sent out the following e-mail to account holders:

TreasuryDirect has completed its security upgrades. Now, it is not necessary to use an access card to log into your account. When you log into your account, you will receive an e-mail containing a one-time passcode and the opportunity to register your computer. Also, for your added security, you will select a personalized image and verify your contact information.

The website was subsequently slammed and completely unusable all day. Always fun to spend the day wondering if your money is still there. 🙂 Today, I was able to log into my account and check out the new process. As mentioned in the e-mail, here are the new layers of security:

  • You must enter your account number, no usernames. So it’s still W-123-456-789, instead of something you would use across multiple websites like “johndoe90210”.
  • If your computer is not recognized, a one-time passcode is sent to the e-mail address on file, valid for only 2 hours. You must enter this passcode to go further, and you can set a cookie to remember your computer and skip this step in the future. For some reason, the cookie didn’t work for me, I always have to go the passcode route. (screenshot)
  • You must set a personalized image and caption text. This is standard procedure amongst banks now to prove that you are on the valid TreasuryDirect site and not a fake spoofing website.
  • Finally, you must enter your account password by clicking keys on a virtual keyboard. This is to counteract keyloggers. As before, You can use a physical keyboard simply by disabling javascript.

I see this as an improvement in accessibility, although probably a slight decrease in security. I’m okay with it; I can finally shred my secret decoder ring access card!

2010 Investment Returns by Asset Class

Vanguard has the year-to-date returns up to 12/31/2010 for all of their mutual funds available right now, so I made a table with all of the funds and asset classes that I like to track for my records. These are almost all passively-managed funds, so they should track their respective indexes closely. 2010 ended up being a relatively good year for most investors, as nearly all the major stock and bond indexes ended up in positive territory. I’ve listed the mutual fund versions for simplicity, even though there is usually an ETF equivalent with similar returns.

Fund Ticker Asset Class 2010 Total Return
Stocks
VFINX S&P 500 14.91%
VTSMX US Total Market 17.09%
VISVX US Small Cap Value 24.82%
VGSIX US Real Estate (REIT) 28.30%
VFWIX International Total Market 11.69%
VGTSX International Total Market 11.12%
VFSVX International Small Cap 17.09%
VEIEX Emerging Markets 18.86%
Bonds
VFISX Short-Term Treasury 2.64%
VIPSX Inflation-Protected Bonds 6.17%
VBMFX Total Bond Market Index 6.42%

As a reminder that being this year’s best performing asset class is no guarantee of for future years, here’s the Callan Periodic Table of Investments that shows the relative performance of 8 major asset classes over the last 20 years. You can find the most recent one below (click to view PDF), which covers 1990 to 2009. (No update to include 2010 yet.) You can find previous versions here.

As you can see, the top performing asset classes is nearly impossible to predict, so holding multiple, low-correlation asset classes and rebalancing can be beneficial.

TreasuryDirect Security: Should All Financial Websites Be Like This?

TreasuryDirect, which allows individuals to buy securities online directly from the US Treasury, has to be the least accessible financial website in the country. It takes me about 20 minutes to log in each time! Let’s look at all the hoops we get to jump through:

Account number – Of course it can’t be a username you can remember like “bob222”, but is more like Z-334-946-124. This makes me have to dig up my encrypted login/password file.

Password – Use your own keyboard? Nope, you must click it out on a randomized virtual keyboard. Gets around basic keyloggers, but not something that catches your screen as well. I’m actually okay with this one, but I’m glad my password isn’t very long and my vision is good.

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Access Card – Finally, you need to read characters off a Access Card in order to access your account. (Like a secret decoder ring!) Of course, being a physical object, I can never find it. I ended up transcribing the entire card contents onto a spreadsheet file, and shredded the card.

Now, finally you can buy a savings bond. Can you imagine the hassle if every financial institution were like this? I understand the need for security, but I think having a physical type of verification token should be an option for the customer, not a requirement.

Lost TreasuryDirect Access Card?
If you lost your card, you’ll have to call (304) 480-7711, verify your identity, and request for a new one to be sent to your mailing address. Your old card will no longer work. In the meantime, no access. Call early and keep trying until you reach someone, because if they’re busy you have to leave a message (no hold system?), and they never called me back.

Treasury Bond Minimum Now $100, But Nothing To Buy

The Treasury recently announced that as of April 7th minimum investment amount for government bonds will be lowered to $100 (previously $1,000). This includes all Treasury marketable bills, notes, bonds and Treasury Inflation-Protected Securities (TIPS). Thanks for the e-mails.

This means you will be able to build a weekly Treasury Bill ladder for as little as $400. Unfortunately, right now yields are so low that I have no reason to bother. The last T-Bill auction resulted in an investment rate of only 0.527% for the 4-week T-Bill, 1.337% for the 6-month T-Bill, and 2.045% for the 2-year T-Note.

Even TIPS are so much in demand that some of them have been trading with a negative real yield. If you are interested in inflation protection, especially for mid-term periods like 5 years, it may be better to simply buy a Series I Savings Bond, which right now has a real yield (fixed rate) of 1.2% through April 30, 2008. You can buy those already for as little as $25 via TreasuryDirect.gov. (There is a purchase limit of $5,000 online and $5,000 paper, although people have reported being able to buy more online.)

My Current Bank Account Setup To Maximize Interest

Over a year and a half ago I shared how I juggled my bank accounts to maximize interest. It was the best I could do then, although it was a bit annoying as transfers between banks still took a couple of days.

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My current set up now involves fewer banks, but I feel it is also both more convenient and earns higher interest. However, whether or not it would work for others depends on their geographic location.

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Washington Mutual – WaMu has a strong branch presence in my area, and there are also ATMs in the grocery stores. Since they started offering their Free Checking and 5% Savings account combo (must open online; you won’t find this advertised in any branch), I have started using it as my primary account due to the combination of convenience, decent interest, and lack of fees.

I can keep a minimal amount of money in the no-fee checking account for my daily cashflow needs, and then a larger chunk can be kept in the savings account to cover the larger monthly bills paid via scheduled online BillPay transfers. If I need to write a big check or send a wire transfer, I can just move money over from the savings account. Also, I still receive a lot of checks so I like the ability to deposit them directly into my savings account. Overall, this keeps a good chunk of my money instantly accessible yet earning decent interest.

For reference, see my WaMu Free Checking + 5% Savings review and how to fund them directly with existing WaMu accounts.

28-Day Treasury Bill Ladder – Again, this may not work for others because the main draw of T-Bills is that the interest paid is exempt from state and local income taxes, which increases their equivalent yield. For those without state income taxes, they have been yielding around 5.1%-5.3% APY. However, for those that do have such taxes, the equivalent yield is significantly higher. Mine is closer to 5.8%-5.9% APY. Thus, the money I can’t see myself needing in less than 28 days (most of it) is kept here.

In addition, I can link TreasuryDirect to my WaMu savings account, so there is no interest lost during transfers. The money is invested immediately into a Treasury Bill upon withdrawal, and upon maturity the money is immediately deposited back into my savings account.

For more information, please see my entries on converting Treasury Bill auction results to equivalent bank interest rates, and how to build a T-Bill ladder.

How Do You Account For Interest From Savings Bonds or Treasury Bills and Bonds On Your Tax Return Forms?

If you earned any interest from Treasury Bills or Savings Bonds last year, and are subject to local or state income taxes, be sure note it on your tax returns! Interest from federal debt obligations such as these are subject to federal tax, but not state or local income taxes. Here are some tips and examples to make sure you file correctly and get all the money that’s owed to you.

First of all, you have to manually go and print our your 1099-INT forms from TreasuryDirect.gov, if that’s how you bought or sold the securities. Go to Manage Direct > Manage My Taxes > Year. It’s not elegant, but at least they provide it… (You can also try calling 1-800-943-6864 to request one be sent to you.) On your federal return, there should be nothing specific to note as they are fully taxable at that level.

If you use online tax software for your state/local income taxes, look very carefully for a question that asks if you need to make any adjustments to your federal income numbers, or if you have any interest from government obligations or debt. If you go to an accountant and they don’t know how to do it – fire them 😉

To find out the applicable lines on the paper forms, first locate your appropriate state tax form in PDF format. It might be a good idea to start with the most general all-encompassing form. Then run a search in Adobe Acrobat for “bonds” or “subtractions” or “adjustments”. You are basically looking for the area where you make adjustments to the federal income figure. You may be referred to a supplemental form. Visually skim for keywords like government bonds, savings bonds, treasuries, or treasury bonds.

California Example

  1. I’ll start with Form 540 [pdf], the most general form.
  2. See per the Form 540 instructions that “If there are differences between your Federal and California income or deductions, complete Schedule CA (540) – California Adjustments
  3. Per the Schedule CA instructions: On line 8 enter in column B (Subtractions) any interest from U.S. Treasury bills, notes, and bonds (and also most U.S. Savings Bonds).
  4. Finish the schedule, transfer the appropriate value to line 14 of Form 540, and now your California taxable income should ignore any government debt interest.

Oregon Example

  1. I started with Form 40.
  2. In the “Subtractions” area, I see Line 16 – “Interest from U.S. government, such as Series EE, HH, and I bonds”. This is where I put in the interest from T-Bills as well.

How To Compare Treasury Bill Returns Directly To Savings Account Rates

I’ve been getting a flurry of questions about comparing Treasury Bills to bank accounts. Here is a step-by-step walkthrough to make it from the weekly auction results to a bank’s quoted APY interest rate.

1. From the recent auction results page, grab the investment rate (not discount rate). This is APR. It is based on a 365-day year and reflects the actual annualized rate to maturity. Here’s the most recent snapshot:

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Let’s take the 28-day T-Bill, which has an APR of 5.247%, or 0.05247.

(If you want to learn more about how the other terms and the relationship between “Discount rate” and “Investment rate”, please see this post on T-Bill terms.)

2. Convert it to APY. APY, as opposed to APR, takes into account the effect of compounding interest. It’s also a higher number, which is why most banks just tell you the APY. An approximate way to convert it to APY is using this formula:

APY = (1 + (APR/PeriodsInAYear) )^(PeriodsInAYear) – 1

For our case, the APR is 0.05247 and PeriodsInAYear= 365/28. Solving for APY, you get 0.05376, or 5.376% APY.

This is only a approximation because you can’t actually reinvest all of the money continuously. For example, you might get back $1,000 from your first T-Bill, but can only reinvest $995 of it in the next T-Bill. The rest must sit in a savings account at best. For 28-day T-Bills, you can get a more accurate number using my 28-Day Treasury Bill APY Calculator.

Assuming a 4.89% APR/5% APY savings account, you’d get 5.367% APY, a bit less. If you don’t pay state or local income taxes, you can stop here. As you can see, it’s very competitive with online savings accounts.

3. Find Your Tax-Equivalent Rate. Treasury Bills are exempt from state and local taxes. Thus if you are subject to such atrocities ;), then your T-Bill rate is actually better than that of a fully-taxable bank account. This is one use for my tax-equivalent yield calculator. You’ll need to know your tax rates and whether you itemize taxes.

Let’s use the 5.367% number from Step 2 and my own tax situation. For 2007, I’ll probably be in the 28% bracket federally, 9% for state, and will itemize. For this specific T-Bill, my final number that I should use to compare to banks is 5.898% APY. Your number will probably vary.

Yes, there are a lot of variables to get the conversion just right. Sorry!

If you are interested in investing in Treasury Bills, please also see my visual guide to building a T-Bill ladder to maximize your returns and also liquidity.

How To Build A Treasury Bill Ladder: A Visual Guide

So you’re interested in buying some Treasury Bills for the potentially higher returns, but aren’t exactly sure how to set it up. Well, this guide is for you! I’ve been laddering T-Bills for over a year now in order to maximize the profit out of my existing house downpayment savings and also my no fee 0% balance transfers.

Quick Facts

  1. Treasury Bills are purchased at a discount and redeemed at the full par value. So for each $1,000 worth, you’ll pay ~$99x dollars upon issue and receive $1000 upon maturity.
  2. Rates are set by auction, so you will not know your exact interest rate before you commit to buy. However, if you are in a high income-tax state the chances are very good that it will be better than similar savings accounts.
  3. Auctions are held on Tuesdays, and the T-Bills both issue and mature on Thursdays.
  4. You must schedule the purchase before Noon EST on the auction date (Tuesdays), otherwise you are pushed to next week.
  5. The transfer of money to/from your bank account upon purchase/maturity is very timely. Thus, if one Treasury Bill matures (deposits $1,000) and another is issued on the same day (withdraws $995), your bank account will have a net positive $5 balance at the end of that day.

Visual Guide To Setting Up A Treasury Bill Ladder
Laddering is a method of purchasing that increases the liquidity of fixed term investments such as Treasury Bills. Imagine if you bought a T-Bill every week, and each one lasts for 4 weeks. After four weeks, you could simply use the proceeds of your first T-Bill to purchase your fifth T-Bill. The week after that, you could use the proceeds from your second T-Bill to purchase your 6th T-Bill, and so on forever. If you stopped buying T-Bills, you would get $1,000 back each week until all have matured.

Since each T-Bill has an investment minimum of $1,000, you would need to commit 4 x $1,000 = $4,000. If you don’t have enough, you can simply buy them at less frequent intervals. Below are four visual examples for buying them every month, every two weeks, and every week:

$1,000 Minimum – Buy a T-Bill Every Month
Assuming a discount value of $995:
Week #1: T-Bill #1 will be issued on Thursday (net taken from bank account: -$995)
Week #5: T-Bill #1 will mature (+$1,000) and T-Bill #2 will be issued (-$995) on Thursday (net: -$990)
(and so on…)

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In some months, there may be a gap between the T-Bill maturing and the next one issuing, but you should never have more than $1,000 invested “outside” in T-Bills. However, you may have to wait up to 28 days for your money to come back to you.

$2,000 Minimum – Buy a T-Bill Every Other Week (Bi-Weekly)
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