Archives for September 2018

TIPS ETF vs. TIPS Mutual Fund vs. Series I Savings Bond: 10-Year Performance Comparison (2008-2018)

Posted on September 9, 2018 // 5 Comments

While updating my portfolio spreadsheet, I noticed that it had been 10 years since I bought my first electronic savings bond. I recently listed Reasons To Own TIPS, Treasury Inflation-Protected Securities and Reasons To Own Series I Savings Bonds. This got me wondering – How did my 10-year savings bond performance compare to buying a TIPS ETF or a TIPS mutual fund?

A $10,000 Series I Savings Bond issued 3/1/2008 is now worth $13,964 as of 9/1/2018, a 3.4% annualized return. The interest automatically accrues and compounds, assuming no withdrawals were made. This is taken straight from my TreasuryDirect.gov account.

The largest TIPS ETF is the iShares TIPS Bond ETF (TIP). According to ETFReplay, below is the total return (green) of $100 invested from March 2008 to September 2018. Total return includes the effect of the immediate reinvestment of any dividends and distributions. TIP is a basket of individual TIPS, with an average effective maturity of about 8 years. $10,000 invested in TIP on 3/3/2008 would have turned into $13,230 on 9/4/18, a 2.8% annualized return.) (Actual dates used are the closest trading days.)

The largest TIPS mutual fund is the Vanguard Inflation-Protected Securities Fund (VIPSX). According to Morninstar, here is the total growth of $10,000 invested from March 2008 to September 2018. VIPSX is a basket of individual TIPS, with an average effective maturity of about 8 years. $10,000 invested in VIPSX on 3/1/2008 would have turned into $13,100 on 9/1/18, a 2.7% annualized return.

I could have also bought an individual TIPS bond back in March 2008 that matured in 2018, but I’m not sure about how to compute the total return with reinvested dividends (which kept varying with CPI) all the way up to today. If someone wants to run the numbers, I’d be happy to add them to this post.

Bottom line. Over roughly the last 10 years, the total returns from owning savings I Bonds vs. popular TIPS ETF vs. popular TIPS mutual fund varied between 2.7% vs. 3.4% annualized. The savings bond probably beat the ETFs and mutual funds slightly this time because it held a fixed rate of 1.2% while the other bond funds have an ongoing ladder of TIPS with lower average real rates. Over the next 10 years, with the current low fixed rates on savings bonds, the ETF and mutual fund might win slightly instead. This is why you would compare the current fixed rate on savings bonds vs. the current real yields on TIPS when considering a purchase between them. I would also factor in the tax deferral feature of savings bonds.

The bigger question is whether you want to own inflation-linked bonds at all. (See links at the top of post for help on that.)

Filed Under: Investing, Savings Bonds //

Kids & Materialism: What Thing Were You Obsessed With in 7th Grade?

Posted on September 5, 2018 // 8 Comments

In the Atlantic article Why Kids Want Things, Dr. Marsha Richins is interviewed about her research on materialism and children. She explores why kids tend to place the most importance on owning and having things during middle school:

I think of seventh grade as being the worst age of a person’s life. It’s really a fraught time, and there’s all this insecurity that kids have about, “Who am I? Do people like me? What kind of person am I?” So, how do we navigate that? Well, our appearance is one of the things we navigate with. So, what does a kid see when they see another kid? They see the expression on their face, they see the body language, the posture, and the clothes they’re wearing. And so a kid who’s not very self-confident in navigating this is going to maybe feel a little more self-confident if they’re wearing the right kind of clothes rather than the wrong kind of clothes. Here we’re learning, right off the bat, that having things can help us define who we are.

Looking back, middle school was indeed the first time that I really started to want certain clothes. My most vivid memory might be somewhat localized and dated, but the trendy thing to wear in my middle school was a Browning Down Jacket:

This $100 jacket basically signaled that you were rich and cool (and cozily warm). Like SUVs or North Face, it also suggests you do rugged activities on the weekends. I never got one as they were too expensive, but I do remember one of my friends successfully begging his parents to buy him one and then him becoming a “cool kid”. My parents did eventually get me (one) Bart Simpson t-Shirt. Nike Air shoes were another item that did not fit in my parent’s budget until I found a pair on clearance in late high school.

My wife says that her 7th grade obsession was Z. Cavaricci pants. (She never got a pair either. Coincidence?)

Until we had this conversation, she had never heard of Browning jackets and that critical buck logo with antlers. I had never heard of Z. Cavaracci pants and the little label on the zipper. It seems like other places had NFL Starter jackets as the hottest item.

As a parent, I’ll have to brace myself against this materialistic tide when the time comes. Is it me, or do the trendy things seem to be more expensive now (iPhones! Apple Watch! Hydroflask that you lose within a week!). I’ll have to try and be a good role model in the meantime:

But one of the most consistent findings is the association between the person’s current level of materialism and how they perceived their parents using things when they were growing up. […] The helpful thing for parents here—and also the harmful—is yes, peers are really important, but our kids are watching us. Our kids are learning from us. A lot of what kids take to be normal comes from what they see us doing. Kids are going to learn what their relationship with products should be by looking at our relationship with products.

See also: We Are All Accumulating Mountains of Things

What thing do you remember coveting in 7th grade?

Filed Under: Frugal Living, Funny //

Best Interest Rates on Cash – September 2018

Posted on September 4, 2018 // 26 Comments

This is my monthly roundup of the best interest rates on cash, 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 are moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 9/4/18.

High-yield savings accounts
While the huge megabanks like to get away with 0.01% APY, getting higher rates is as easy as transferring some money electronically from your checking account to an online savings account. Keep in mind that the interest rates on savings accounts can drop at any time, so consider prioritizing banks with a history of competitive rates.

  • CIT Bank Money Market offers 1.85% APY with no minimum balance ($100 to open), no max balance cap. Redneck Bank offers 2.00% APY on a maximum balance of $50k. Several other established high-yield savings accounts are in this close range.
  • In terms of newcomers, Customers Bank offers 2.25% APY guaranteed until 6/30/19, but with a minimum balance of $25k+. Northfield Bank has a Platinum Savings Online (not their regular Platinum Savings) at 2.25% APY up to $100k, but there is an $8 monthly fee if under $2,500.
  • My “hub” bank account is the Ally Bank Savings + Checking combo due to their history of competitive rates, 1-day external bank transfers, and overall ease of use. The free overdraft transfers from savings allows to me to keep my checking balance at a minimum. Ally Savings is currently at 1.85% APY. From here, I open “spoke” accounts and CDs to lock in higher rates.

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 2.08% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund, which has an SEC yield of 1.93%. 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 2.42% SEC Yield ($3,000 min) and 2.52% SEC Yield ($50,000 min). The average duration is ~1 year.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 2.42% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 2.54% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

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 flexible short-term CD under the FDIC limits until you have a plan.

  • USALLIANCE Financial Credit Union has a 1-year CD at 2.75% APY ($500 minimum new money) with an early withdrawal penalty of 6 months interest. You must join the credit union first, but anyone can join via American Consumer Council (ACC). CIT Bank 1-year CD is at 2.50% APY ($1,000 minimum) with an early withdrawal penalty of 3 months interest.
  • For more flexibility, the Ally Bank 11-month No Penalty CD is at 2.00% APY ($25k minimum) and the CIT Bank 11-Month No-Penalty CD is at 1.85% APY with a lower $1,000 minimum. The lack of early withdrawal penalty means that your interest rate can never go down for 11 months, but you keep full liquidity. You can open multiple CDs in smaller $1,000 increments to get even more flexibility.

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 2018 and October 2018 will earn a 2.52% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 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). Some folks don’t mind the extra work and attention required, while others do. There is a long list of previous offers that have already disappeared with little notice.

  • The only notable card left in this category is Mango Money at 6% APY on up to $5,000, but there are many hoops to jump through. There is a $3 monthly fee and you need to maintain a minimum $800 net direct deposit each month. This means you can’t direct deposit $800 and also take out $800 via online transfer. Checks and ATM withdrawals have additional fees. The only thing left is to spend the money via the Visa debit feature (and miss out on flat 2% cash back on all purchases).

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. 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 to near-zero quickly, leaving a “bait-and-switch” feeling. That’s just how it goes with these types of accounts.

  • Consumers Credit Union recently announced changes starting 10/1/18, including lower balance limits ($10k down from $20k) and more restrictive requirements, but also higher interest rates in some tiers. Free Rewards Checking now offers 3.09% to 5.09% APY on up to a $10k balance depending on your qualifying activity. The highest tier requires their credit card in addition to their debit card (other credit cards offer $500+ in sign-up bonuses). Keep your 12 debit purchases just above the $100 requirement, as for every $500 in monthly purchases you may be losing out on 2% cash back elsewhere (or $10 a month after-tax). Thanks to reader Jonathan for the heads up. 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 building a 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.

  • Synchrony Bank has a special 13-month CD at 2.65% APY ($2,000 min). Note that the early withdrawal penalty is relatively big at 6 months of interest. NASA Federal Credit Union has a special 15-month Share Certificate at 3.25% APY ($5,000 min, EWP 6 months). Anyone can join this credit union by joining the National Space Society (free). However, NASA FCU will perform a hard credit check as part of new member application.
  • Ally Bank has a 5-year CD at 3.00% APY ($25k minimum) with a relatively short 150-day early withdrawal penalty. For example, if you closed this CD after 2 years you’d still get a 2.39% effective APY even after accounting for the penalty. (2.61% at 3 years.)
  • United States Senate Federal Credit Union has a 5-year Share Certificate at 3.53% APY ($60k min), 3.47% APY ($20k min), or 3.41% APY ($1k min). Note that the early withdrawal penalty is a full year of interest. Anyone can join this credit union via American Consumer Council.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable fixed early withdrawal penalties. As of this writing, Vanguard is showing a 3-year non-callable CD at 3.00% APY and a 5-year non-callable CD at 3.35% APY. Watch out for higher rates from callable CDs listed by Fidelity.

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 long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable fixed early withdrawal penalties. As of this writing, Vanguard is showing a 10-year non-callable CD at 3.45% APY. Watch out for higher rates from callable CDs from Fidelity. Matching the overall yield curve, current CD rates do not rise much higher 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 9/4/18.

Filed Under: Banking, Deals & Offers //
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