Archives for February 2018

Short-term interest rates continue to rise, as are inflation expectations. Meanwhile, the 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 2/4/18.

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.

• AbleBanking at 1.70% APY, DollarSavingsDirect and Live Oak Bank at 1.60% APY, CIT Bank at 1.55% APY, all with no minimum balance requirement. SalemFiveDirect, Marcus/GS Bank at 1.50% 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 1.35% 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 1.45% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund, which has an SEC yield of 1.29%. 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 1.88% SEC Yield ($3,000 min) and 1.98% SEC Yield ($50,000 min). The average duration is ~1 year.
• The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 1.75% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 1.86% 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.
• Live Oak Bank has a 12-month CD is at 2.10% APY with a $2,500 minimum deposit. Early withdrawal penalty is 90 days of interest. Ally Bank has a 12-month CD at 2.00% APY again, but with $25,000 minimum deposit. Early withdrawal penalty is 60 days of interest.

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. For example, Northpointe Bank was mentioned for several months here but recently stopped accepting new applications. Unclear how long existing accountholders will be grandfathered. That’s just how it goes with these types of accounts.

• 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.

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.

• Live Oak Bank has an 18-month CD at 2.30% APY ($2,500 min) and a 24-month CD at 2.35% APY ($2,500 min). The early withdrawal penalty is the equivalent of 90 days of interest on the principal amount withdrawn for CD terms less than 24 months or 180 days of interest on the principal amount withdrawn for CD terms of 24 months or longer.
• Ally Bank has a 5-year CD at 2.50% APY ($25,000 minimum) with a relatively short 150-day early withdrawal penalty and no credit union membership hoops. For example, if you closed this CD after 2 years you’d still get an 1.99% effective APY even after accounting for the penalty.
• Connexus Credit Union has a 5-year Share Certificate at 3.00% APY ($5,000 minimum deposit) with a 365-day early withdrawal penalty $5,000 minimum deposit. Anyone can join this credit union via partner organization Connexus Association for a one-time $5 fee. I ran a Ally vs. Connexus 5-year CD comparison to show the effect of a larger early withdrawal penalty. Note that Ally rates have risen a bit since that post was published.

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.

• 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 2.85% 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. 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 2/4/18.