Savings I Bonds November 2018 Interest Rate: 2.32% Inflation Rate, 0.50% Fixed Rate

November 1, 2018 By Jonathan Ping 9 Comments
“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

sb_poster

Update 11/1/18. The fixed rate will be 0.50% for I bonds issued from November 1, 2018 through April 30, 2019. The variable inflation-indexed rate for this 6-month period will be 2.32% (as was predicted). The total rate on any specific bond is the sum of the fixed and variable rates, changing every 6 months. If you buy a new bond in November 2018, you’ll get 2.82% for the first 6 months. See you again in mid-April 2019 for the next early prediction.

Original post 10/14/18:

Savings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. You could own them as an alternative to bank certificates of deposit (they are liquid after 12 months) or bonds in your portfolio.

New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the November 2018 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a October 2018 savings bond purchase will yield over the next 12 months, instead of just 6 months.

New inflation rate prediction. March 2018 CPI-U was 249.554. September 2018 CPI-U was 252.439, for a semi-annual increase of 1.16%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 2.32%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be very different than one from recent years.

Tips on purchase and redemption. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A known “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.

Buying in October 2018. If you buy before the end of October, the fixed rate portion of I-Bonds will be 0.30%. You will be guaranteed a total interest rate of 2.52% for the next 6 months (0.30 + 2.22). For the 6 months after that, the total rate will be 0.30 + 2.32 = 2.62%.

Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on October 31st, 2018 and sell on October 1, 2019, you’ll earn a ~2.09% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you held for three months longer, you’d be looking at a ~2.20% annualized return for a 14-month holding period (assuming my math is correct). Compare with the best interest rates as of October 2018.

Buying in November 2018. If you buy in November 2018, you will get 2.32% plus a newly-set fixed rate for the first 6 months. The new fixed rate is unknown, but is loosely linked to the real yield of short-term TIPS, which has been rising a bit. The current real yield of 5-year TIPS now about ~1.00%. My best guess is that it will be 0.50% or 0.60%. Every six months, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.

If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (set at purchase) + variable rate (minimum floor of 0%).

Buy now or wait? In the short-term, these I bond rates will not beat a top 12-month CD rate if bought in October, and probably won’t if bought in November unless inflation skyrockets. Thus, I probably wouldn’t buy in October. I haven’t bought any savings bonds yet this year, and will wait until November to see what the new fixed rate will be. If it greatly lags the real yield on short-term TIPS, then I will probably just buy TIPS instead. However, if it is close, I will probably buy some savings bonds as a long-term investment given the unique benefits below.

Unique features. I have a separate post on reasons to own Series I Savings Bonds, including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.

Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.

Annual purchase limits. The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper bonds using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.

For more background, see the rest of my posts on savings bonds.

[Image: 1946 Savings Bond poster from US Treasury – source]

Filed Under: Banking, Investing, Savings Bonds
Last updated: November 6, 2018

Chase Bank Bonus: $600 Total Checking + Savings, 60,000 Point Upgrade to Sapphire Banking

October 25, 2018 By Jonathan Ping 5 Comments
“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Chase Bank has updated banking promotions for new customers without a Chase Bank account (closed more than 90 days ago and haven’t gotten a bonus in the last 2 years). The first bonus is for their Total Checking and Savings accounts, and if you satisfy that and have a Sapphire credit card, you can upgrade to the Sapphire Banking with higher requirements.

  • Up to $600 for opening a new Total Checking + Savings account. You must move over a direct deposit on the new checking account ($300 bonus), and/or deposit and maintain $15,000 in the savings account for 90 days ($200). Do both, and get another $100, for $600 total. The easiest way to avoid monthly fee is to keep $1,500 in Total Checking and $300 in Savings.
  • 60,000 Ultimate Rewards points for upgrading to a Chase Sapphire bank account. Got a Chase bank account and a Sapphire credit card? They want your business, so take a look at their upgrade offer to Sapphire Banking. You must move over $75,000 in assets (bank deposits or securities) to Chase Bank or Chase You Invest brokerage. You can simply move over some existing stocks, ETFs, or mutual funds via ACAT transfer and your tax cost basis should transfer. Alternatively, you could buy US Treasury bills in the brokerage account as an alternative to Chase Bank’s sad interest rates. You need to also have the Chase Sapphire Preferred or Chase Sapphire Reserve credit card.

Together, this could be up to $1,500 total value. If you have the Chase Sapphire Reserve card, the 60,000 points are worth $900 towards travel (or 60,000 airline miles). $900 airfare/hotel/car rental value + $600 cash = $1,500. If you have the Chase Sapphire Preferred card, the 60,000 points are worth $750 towards travel (or 60,000 airline miles).

Here are previous posts on the Chase Total Checking bonus and Chase Sapphire Banking bonus with more details.

Filed Under: Banking, Deals & Offers, General
Last updated: November 8, 2018

Ally Bank Payback Time Promotion: 1% Additional Cash Bonus (~6% APY 3-month CD)

October 15, 2018 By Jonathan Ping 19 Comments
“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Ally Bank has a new promotion called Ally Payback Time that is offering a 1% cash bonus (up to $1,000) on new deposits on top of their existing interest rates. Valid for both new and existing customers. Given the holding period, this roughly equates to the same total interest paid as a 3-month bank CD at 6% APY. Here’s how it works:

  • Enroll by 10/21/18 at ally.com/payback. You must enroll or you won’t get the bonus. Existing customers must enroll with the same e-mail as linked to their Ally bank account.
  • Fund account by 10/31/18. This means your account has to be approved, opened and funded by this date. Technically the terms state that the funds must arrive by 11/5/18, but that is likely just a grace period and you should initiate any fund transfers by 10/31/18.
  • Maintain funds through 1/15/19. You must keep your new funds there through 1/15/19. This is really only a 2.5 month period if you waited until the last moment. Withdrawals may lower your bonus.
  • Get cash bonus on 2/15/19. After another 30 days, they will deposit your cash bonus into your Ally account.

To be clear, the bonus applies to new funds added to an eligible Ally bank account, not your total balance. Eligible accounts include Ally Online Savings, Money Market, Interest Checking, and CD accounts.

Rough math. The current rate on the Ally Online Savings account is 1.90% APY, and the 11-month No Penalty CD is 2.10% APY on $25k+ balances (as of 10/15/18). Given that you can an additional 1% bonus in a bit under 3 months, the bonus itself works out to the equivalent of a 4% annualized yield. 2% plus 4% = 6%, so you’re looking at the equivalent of a 3-month CD at 6% APY for new money deposits between $1,000 and $100,000. At such a high yield, this promo is a “no-brainer” when compared to other liquid savings accounts for the next 3 months.

The promo page has a calculator to show you your total cash earned over a year. If you move over $10,000 at 1.90% APY, you’d get $190 of interest in a year plus a $100 bonus = $290 total. That would work out to a total of 2.9% APY if you were lazy and just kept it all there for a year. Still not too shabby.

Should I move money out of Ally and back in to qualify? No, it won’t make any difference as Ally has already thought of that. All new funds added after 10/8/18 will count as new money for this promotion. They’ve already set the start date in the past, so you gain nothing by delaying your enrollment.

Existing customers. As a longtime Ally accountholder, I’m happy to see that this offer includes existing customers, even if it has to be new money. The promotion should be called the “Ally Money Comeback Time” as lots of people are probably bringing back funds that in the past year or so.

Payback Time? This YouTube ad explains the meaning behind “Payback Time”, basically the megabanks pay you no interest and keep it for themselves:

Bottom line. Ally Bank has a new promotion to attract new money (or bring back old money). You get a 1% cash bonus (up to $1,000) on new deposits on top of their existing interest rates. For their savings account, this works out to a 3-month holding period paying roughly 6% annualized interest. You must enroll soon by 10/21 and your account must be opened and fully funded by 11/5/18 at the very latest.

Filed Under: Banking, Deals & Offers
Last updated: October 15, 2018

Citibank $500 Checking Account Bonus 2018

October 3, 2018 By Jonathan Ping 9 Comments
“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Citibank has $500 bonus offer when you open a new eligible Citi checking account 10/1/18 through 12/31/18 and complete qualifying activities. This offer is restricted to those who have not had a Citibank checking account within the last 180 calendar days.

Here are the bonus requirements, condensed from their full terms and conditions:

  • You must first enroll at citi.com/checkingrewards (or in-branch).
  • You must open a new Citibank Checking and Citi Savings Account in “The Citibank Account Package”.
  • You must make a deposit of $15,000 or more (multiple deposits okay) in “new-to-Citibank” funds within 30 days of account opening.
  • For the $400 bonus, you must maintain a minimum balance of $15,000 for 60 consecutive calendar days after deposit. The $15,000 can be spread between checking and savings.
  • For an additional $100 bonus, you must also complete a “Qualifying Direct Deposit” into the Checking Account for two consecutive months within 60 days of account opening. Payroll works but any ACH transfer accounts (i.e. interbank ACH counts).
  • The $400 or $500 bonus which will be credited within 90 calendar days from the date you complete all required activities.
  • Note that accounts with a zero balance for 90 days are subject to automatic closure and closed accounts can’t get the bonus. Therefore, always keep at least $5 in each account until you see the bonus.

Here’s how to avoid monthly account fees. You must maintain a combined average monthly balance of $10,000+ in eligible linked deposit, retirement and investment accounts. A monthly service fee of $25 and a $2.50 non-Citibank ATM fee applies to the checking account in The Citibank Account Package if a combined average monthly balance of $10,000 or more is not maintained. You can view your state-specific fee schedule at citi.com/compareaccounts. Scroll down to “The Citibank Account package”.

Bonus net value calculations. I like this bonus because it doesn’t require too much attention. You open the accounts and deposit $15,000, which you can spread between checking and savings (be sure to maintain a non-zero amount in both). Simply leave it there for 60 days. The direct deposit requirement is easy because there is no minimum amount and you can simply initiate an ACH transfer from another bank:

A “Qualifying Direct Deposit” is an Automated Clearing House (ACH) credit, which may include payroll, pension or government payments (such as Social Security) by your employer, or an outside agency.

However, there are a few noteworthy wrinkles! The main “catch” is that even though you “qualify” for the bonus after 60 days, you may have to wait another 90 days to actually get the bonus. Meanwhile, you need to keep both Citibank accounts open and in good standing, which either requires a minimum monthly balance of $10,000 or a $25 monthly fee. If you moved the $15,000 to a 2% APY savings account after 60 days, you would earn $25 in interest each month but also have to pay a $25 monthly fee.

Earning $500 of interest on $15,000 in 60 days works out to the equivalent of about 20% APY. However, earning $500 of interest on $15,000 in 150 days is a less impressive 8% APY. You could take out $5,000 after 60 days (maintaining only the $10k minimum) to boost your effective rate back up 10% APY. Even after you account for this, you still net $375 over a 2% APY savings account over 5 months. Bonus will be reported on 1099-INT (as should be expected).

If you were interested in a Citibank checking account anyway, you can always do the bonus now and downgrade to their “Account Account Package” which has no monthly fee if you make one direct deposit, one bill pay, or a $1,500 minimum balance each month ($10 otherwise).

ThankYou points. It’s not a lot, but The Citibank Account Package also earns ThankYou points for certain activities. For just having a savings and checking together, you can earn 150 points per month. For adding more things like an auto-save transaction or a linked Citi mortgage, you can get up to 450 points per month. Details here. Combine with the Citi ThankYou Premier Card which lets you redeem points for travel at a 25% bonus (1 ThankYou point = 1.25 cents towards travel).

Finally, I have done Citibank bank bonuses in the past and haven’t had any issues. However, others have reported having to call them up and ask for the bonus. I would simply be sure to keep track of your promotion details and transaction dates in a Google Doc or other spreadsheet, which you should always do anyway.

Bottom line. Citibank has a $500 bonus for opening a new checking + savings account and keeping $15,000 in there for 2-5 months, along with a few other requirements like making two ACH deposits. The bonus works out to roughly 10% APY when you keep the minimum required cash there. As compared to a 2% APY savings account, the net gain is about $375.

Filed Under: Banking, Deals & Offers
Last updated: October 3, 2018

Best Interest Rates on Cash – October 2018

October 1, 2018 By Jonathan Ping 11 Comments
“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Here’s 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 extra interest you’d earn if you are moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 10/1/18.

High-yield savings accounts
While the huge megabanks like to get away with 0.01% APY, getting higher rates is as easy as transferring money electronically from your checking account to an online savings account. The interest rates on savings accounts can drop at any time, so I prioritize banks with a history of competitive rates. Some banks will bait you and then lower the rates in the hopes that you are too lazy to leave.

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 2.13% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund, which has an SEC yield of 2.00%. 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 2.46% SEC Yield ($3,000 min) and 2.56% SEC Yield ($50,000 min). The average duration is ~1 year.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 2.44% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 2.56% 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.

  • Customers Bank has a liquid savings account at 2.25% APY guaranteed until 6/30/19, but with a minimum balance of $25k.
  • The Ally Bank 11-month No Penalty CD is at 2.10% APY ($25k minimum) and the CIT Bank 11-Month No-Penalty CD is at 2.05% 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.
  • 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).

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. This means you have to spend the money via the Visa debit card (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.
  • If you’re looking for a non-rewards high-yield checking account, MemoryBank has a checking account with no debit card requirements at 1.60% APY.

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.

  • Luther Burbank Savings has an 18-month Step Up CD that pays a blended 2.83% APY ($1,000 min). 6 month early withdrawal penalty.
  • Ally Bank has a 5-year CD at 3.00% APY ($25k min) 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 3.63% APY ($60k min), 3.51% APY ($20k min), or 3.45% 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 3.10% APY and a 5-year non-callable CD at 3.40% 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 3.50% 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 10/1/18.

Filed Under: Banking, Deals & Offers
Last updated: November 8, 2018

Chase Sapphire Banking: 60,000 Bonus Points For New Customers

September 16, 2018 By Jonathan Ping 6 Comments
“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Update October 2018. Here is the 60,000 point application link. Open by 1/11/19. Within 45 calendar days, transfer a total of $75,000 or more in qualifying new money or securities to a combination of eligible checking, savings and/or investment accounts, and maintain that balance for at least 90 days. Within 45 business days of doing that, they will give you the 60,000 bonus points to your Chase Sapphire card with Ultimate Rewards.

Original post:

Chase Bank has a new premium checking account tier called Sapphire Banking. To qualify, you will need to maintain at least $75,000 in deposits or investments in qualifying Chase accounts. Otherwise, a $25 monthly fee applies. Sapphire Banking perks include:

  • No ATM fees, including rebates on fees charged by non-Chase ATMs.
  • No fees for foreign exchange (ATM/debit), outgoing wire transfers, or stop payments.
  • No fees on the first four overdrafts within 12 months.
  • Free online stock and ETF trades with You Invest by JP Morgan.
  • Access to Sapphire lounges at concerts, sports and special events, early ticket sales and premium seats
  • $0 monthly service fee on a linked Chase Total Business Checking account.

Everyone wants assets under management now, even the banks. Since investments count towards the $75,000 requirement, if you have that much in ETFs, mutual funds, or stocks at another broker, you could perform an in-kind ACAT transfer over to Chase You Invest. This would let you avoid parking $75,000 at Chase earning nearly zero interest. (2% interest on $75k is $1,500 per year.) I’ve previously moved over some Vanguard funds to Bank of America / Merrill Edge in order get their asset-based perks. Alternatively, you could move over some cash and then invest in US Treasury bills via their brokerage and earn some competitive interest on safe cash equivalents.

Here’s the fine print:

There is a $25 Monthly Service Fee for Chase SapphireSM Checking OR $0 when you have an average beginning day balance of $75,000 or more in any combination of this account and linked qualifying deposits/investments. Qualifying personal deposits include this checking account and up to nine personal Chase checking accounts (excluding Chase Private Client CheckingSM ), personal Chase savings accounts (excluding Chase Private Client SavingsSM), Chase Liquid® Cards, CDs, certain Chase Retirement CDs, or certain Chase Retirement Money Market Accounts (balances in Chase Money Purchase Pension and Profit Sharing Plans do not qualify). Qualifying personal investments include prior end of month balances for investment and annuity products offered by JPMorgan Chase & Co. or its affiliates and agencies. Balances in certain retirement plan investment accounts, such as Money Purchase Pension and Profit Sharing Plans, do not qualify. Investment products and related services are only available in English.

New account bonus. According to this press release, “Sapphire cardholders will be able to earn 60,000 Ultimate Rewards points when they bring in $75,000 in new qualifying deposits and investments and open or upgrade to a Sapphire Banking account”. The exact date is to be announce “shortly”, but it will be sometime in October. This language suggests you’ll need to also have either the Chase Sapphire Preferred or Chase Sapphire Reserve credit cards. Offer is available online and in-branch.

Now, 60,000 Ultimate Rewards points can be redeemed for $600 cash. With the Sapphire Preferred card, 60,000 UR points can be redeem for $750 in travel booked through Chase’s Ultimate Rewards portal (think Expedia). With the Sapphire Reserve card, 60,000 UR points can be redeem for $900 in travel booked through Chase’s Ultimate Rewards portal (think Expedia). You could also transfer those points to airline miles. That’s a pretty good bonus, although I wonder if Chase will issue a 1099-INT and with what value amount.

Cost-benefit analysis. I don’t know of Chase savings accounts with high interest rates. That means if you’re bringing over cash, again you might be giving up bank interest of 2% or higher. $75,000 would earn $125 interest per month at 2% APR. If they require you to keep it there for 90 days and it’s in an account that doesn’t earn any interest, that’s $375 in foregone interest already. Then you have to wait up to another 45 days to get the bonus, during which you’ll need to keep the account open. If you take out all your money, you’ll still need to pay the $25 monthly fee, which means another $50 to keep it open two more months. I don’t like having to give up hundreds of dollars upfront in the hopes of an eventual bonus. I would consider moving over some index funds instead, especially if they agree to rebate the account transfer fee ($25 to $75), as many other brokers do. I’ll wait until all the details come out.

Bottom line. Chase Bank has a new premium checking account tier called Sapphire Banking, targeted at the “mass affluent”. There is a new account bonus of 60,000 Ultimate Rewards points for existing Sapphire credit cardholders if you move over $75,000 in cash and/or investment assets, but the full details have not yet been confirmed.

Filed Under: Banking, Credit Cards, Deals & Offers
Last updated: October 25, 2018

How To Enable Auto Sweep on Paypal Accounts (2018)

September 12, 2018 By Jonathan Ping 9 Comments
“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

If you use PayPal to accept credit cards for your small business (eBay, Etsy, e-store, freelance, etc), you may not want to keep your money sitting at PayPal (especially if you are earning higher interest in your bank account). There is a feature called Auto Sweep that checks daily and automatically “sweeps” any money that arrives in your PayPal account into your bank account overnight.

The Auto Sweep feature used to be easily found in their settings. Then they moved it into a dim corner of their website that was harder to find. Last week, I couldn’t find it at all. After digging through several outdated articles, it turns out that as of 2018 you can’t access the feature at all unless you call in and ask for it explicitly. Not exactly customer-friendly behavior, but PayPal makes money off your idle balances… (The PayPal Money Market fund that offered higher interest shut down in July 2011.)

Here’s how to enable Auto Sweep on your PayPal account as of 2018. This is another post for the benefit for others searching online. First, make sure you meet these requirements:

  • You must have a Business PayPal account in good standing.
  • You must have a bank account linked to your PayPal account.
  • You must have lifted your withdrawal limit and verified your PayPal Account.

Next, you must call PayPal directly via phone.

  • Once logged into your PayPal account click Contact at the bottom of the page.
  • Choose the Call Us option and call the number listed for your account. Use the unique code to quickly identify yourself to them.
  • When you reach a human, explicitly ask for “Auto Sweep” to be enabled on your account.

After that, they will flip a switch on their end, and you should finally be able to see the option enabled on your online account. Log back into your PayPal account and follow these instructions:

  • Click Profile beside “Log Out” and select Profile and settings.
  • Click My money.
  • Click Set near “Automatic transfers.”
  • Click Edit.
  • Click Yes, select the bank you want your money transferred to, and click Save.

Here’s what you should see after Auto Sweep has successfully been turned on:

There you go. Note that if you ever manually request a cash transfer from a bank account to your PayPal balance, that this would automatically turn off Auto Sweep. I guess the money running around in circles causes a tear in the time-space continuum or something. (You can go back an turn Auto Sweep back on manually.)

If you activate this feature, it may also change your how you use the PayPal Business Debit card, as there will no longer be any cash balance in your account to draw from. For non-PIN signature purchases, these will still work if you first link a bank account as a backup source, and then the debit card charges will pull from your designated backup source. You can also link up certain PayPal credit cards (source), but not just any credit card as backup. For ATM withdrawals, you will not be able to make ATM withdrawals with a zero PayPal balance (source).

I wouldn’t really recommend using the debit card anyway, there are much better small business card options with no annual fee.

Filed Under: Banking, Credit Cards, Entrepreneurial
Last updated: September 13, 2018

CIT Bank Review: 11-Month No Penalty CD 2.05% APY, 18-Month CD 2.50% APY, Savings Builder 2.25% APY

September 11, 2018 By Jonathan Ping 31 Comments
“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

citbank200

Rates updated 1/3/19. CIT Bank (not to be confused with Citi Bank) is an online-only bank with a multi-year history of competitive rates. They don’t offer a checking account and instead focus on a variety of savings and CD products with high interest rates. Here are the highlights:

  • 11-Month No-Penalty CD at 2.05% APY with $1,000 minimum to open. 11-month CD keeps a fixed rate, but no withdrawal penalty seven days or later after funds have been received. This means that your interest rate will never go down, but you can still move out if interest rates go up. (If you have an existing No Penalty CD that you want to close and open up a new one, please see my instructions below.)
  • Savings Builder Account at 2.45% APY if you maintain at least one single monthly deposit of $100+, OR maintain a balance of $25,000+. Details here.
  • Money Market Account at 1.85% APY, currently available on all tiers ($0+) with no max. $100 minimum to open, but no minimum balance requirement. Up to 6 withdrawals per month.
  • 18-month CD at 2.50% APY, 13-month CD at 2.25% APY. Each CD also has a $1,000 minimum opening deposit. The early withdrawal penalty is 6 months of interest on CD with terms of 1 to 3 years.

Each of these types of account has their pros and cons. The No-Penalty CD has a rate that can’t go down, but also has a $1,000 minimum balance. The 18-month CD has a higher rate, but significant penalties if you make an early withdrawal. The Money Market rate could rise or drop, and also has more flexibility as you can easily make more deposits and also make 6 withdrawals every month.

Check out my rate chaser calculator to see if it makes sense for you to move money over.

New customer? Opening process overview. Here’s my review of the opening process if you are a new customer.

  • The application process was completely online. You provide the usual personal information.
  • You must submit to a credit check, but in my experience it was a “soft” pull which did not harm my credit. None of my various credit monitoring services showed it was a hard pull.
  • You may fund via (1) electronic ACH transfer, (2) wire transfer, (3) mobile check deposit via CIT Bank mobile app (iOS and Android), and (4) mailing in a paper check. There was no option for credit card funding. I picked online ACH funding and you need to provide routing and account numbers, followed by manual verification via micro-deposits after a day or two. There was no instant linking option via login information.

After deposit verification, then your funding will go through.

You have successfully verified your external account. Please allow up to 5 business days for your funds to appear in your CIT Bank account.
No further action is required for this account. Thank you!

citnewcd

Existing savings or money market customer? Check your rate. If you already have an existing High Yield Savings account, it may remain at a lower interest rate than this money market account. If so, take a minute and upgrade yourself to the better interest rate. Click on “Open an Account” here, then “I have a CIT Bank account”, and then login with your username/password. You can do everything online and even fund your new Money Market account with an instant transfer from your existing Premier High Yield Savings. I wish I didn’t have to do this, but at least it literally only took a minute to complete.

citmm

How to transfer your money from an existing No Penalty CD into an new, higher-rate No Penalty CD (or any other new account). Let’s say you opened up a No Penalty CD at 1.55% APY or 1.85% APY, but then the rate for a new CD has risen to 2.05% APY. You have the option of moving the funds (with no penalty of course) over to a new CD with a new 11-month holding period. I just did this, and here’s the easiest way to do so:

  • Start a new online application for the 11-Month No-Penalty CD. Click on “Get Started” and sign-in as an existing CIT customer.
  • After signing in, go through the opening process but look for “Existing CIT Bank Account” under “Funding Source”. You should see a list of your existing accounts, including any No Penalty CDs. (Screenshot below.)
  • Note that online, your only option will be to have the entire CD balance (including accrued interest) moved over into the new CD. If you want a different amount, you’ll have to call CIT Bank customer service at 855-462-2652, open M-F 8a-9p ET, Sat 9a-5p ET, Sun 11a-4p ET. Press “0” for operator. Tell them you opened up a new No Penalty CD and you wish to fund it by closing out your old No Penalty CD.
  • That’s it. The online option says it will take 2-3 business days to complete. Your new accounts will show up online.

User interface. While the front-facing website is pretty slick, after you login the backend is run by Fidelity National Information Services (subdomain ibanking-services.com). This is a popular backend software system used by many smaller banks who don’t want to create their own software from scratch. As of early 2018, the user interface was upgraded to be look more appealing and be more user-friendly. Two-factor authentication is available using voice or SMS.

There is also an app available (iOS/Android) provided by the same company. It is similarly functional and includes mobile check deposit. Here are some screenshots:

citapp

Bottom line. CIT Bank is a lean bank offering targeted products for folks looking to get higher interest rates on their cash balances. They don’t do physical bank branches, checking accounts, or fancy apps. However, I have been pleasantly satisfied with their customer service on my accounts with them. Their most compelling products are their Money Market accounts, 11-month No Penalty CD, and usually they have a top rate on one of their Term CDs. The No Penalty CD is unique in that you are always able to move out to a higher rate, even within CIT bank itself.

Filed Under: Banking, Deals & Offers, Reviews
Last updated: January 3, 2019

Best Interest Rates on Cash – September 2018

September 4, 2018 By Jonathan Ping 26 Comments
“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

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
Last updated: November 8, 2018

Chase You Invest: 100 Free Stock Trades Details and Comparison

August 21, 2018 By Jonathan Ping 4 Comments
“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Chase just announced a new free stock trade program as part of a new online brokerage arm called You Invest. This means another megabank is moving more heavily into “relationship banking” where they hope you will keep your bank accounts, credit cards, brokerage accounts, and mortgage all at the same place. This is pretty significant as JP Morgan Chase is the largest US bank in terms of both market value and total customers (over 60 million).

According to CNBC, here are the offer details:

  • 100 free trades per year for the first year. Launches next week. Free trades must be done online or via app. Anyone can open a You Invest Trade account with no minimum balance requirement. You can fund with a Chase account or another external bank account.
  • After the first year, 100 free trades per year ongoing for those with $15,000+ in combined balances (Premier level). Assuming this matches up with their Premier banking rules, which I believe it should, the $15,000 includes both bank deposits and investment balances.
  • Unlimited free trades per year ongoing for Private Banking clients. The article says this typically requires at least $100,000 in combined balances. However, their Private Banking page says the requirement is $250,000. I suspect that the $100,000 combined limit means that (upcoming) Chase Sapphire Banking clients will qualify for unlimited trades.
  • In January 2019, Chase plans to launch a You Invest Portfolios service which is more of a robo-advisor that helps manage your portfolio for a fee.
  • If you exceed the free trade allotment, additional trades are $2.95 each.

Combining with other Chase products. In terms of credit cards, Chase has done well with their Chase Sapphire Preferred and Chase Sapphire Reserve cards. However, they currently don’t offer any bonus features if you have a bank or brokerage relationship. In terms of banking, Chase is also expected to launch a Sapphire Banking tier at the $100,000 total asset level. Chase also lets you qualify for their Premier Plus banking product via a Chase first mortgage with automatic payments.

The competition. Bank of America currently offers 30 free trades per month at their Platinum Preferred Rewards tier ($50,000 in total bank/investment assets) and 100 free trades/month at their Platinum Honors tier ($100,000 in total bank/investment assets). Bank of America offers a 50% bonus (Platinum) and 75% bonus (Platinum Honors) on eligible BofA Rewards credit cards. I moved over some assets to Merrill Edge specifically to qualify for the free trades and this bonus. So it worked on me for BofA, and it might work for Chase if they sweeten the pot enough.

Wells Fargo does not currently offer any free trades to banking customers with big balances, closing their program to new sign-ups in 2013. Citibank has been offering more bonuses on both their banking and credit cards, for example with the new Citi ThankYou Premier card.

Vanguard has just rolled out its free ETF trade program covering nearly all ETFs that they don’t think are too risky (leveraged and inverse ETFs). Fidelity also recently cut a lot of fees and minimums as well, some of which apply to their banking products. Vanguard, Fidelity, and Schwab all have commission-free trades on select low-cost index ETFs, on top of which they have been adding more banking features.

The Robinhood app offers unlimited free trades, free options trading, and a web interface now. A Chase executive threw some shade at them with the quote “There are customers out there who may not want to trust their credentials or their money to an app of the month”. Hah!

Filed Under: Banking, Investing
Last updated: August 24, 2018

Are You Indirectly Losing Money via Your Brokerage Cash Sweep Account?

August 9, 2018 By Jonathan Ping 12 Comments
“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

A recent WSJ article by Jason Zweig calls attention to one of the hidden ways that brokerage firms make money from you. As interest rates rise, they go out and earn the highest market rates while giving you a lot less on your idle cash. The difference adds up to big profits.

Brokerage accounts used to make you buy a money market fund with a high expense ratio. These days, they use a “bank sweep” account. They advertise the FDIC insurance, but hide the fact that they often own the bank and are skimming millions in interest:

In a bank sweep, your brokerage automatically rakes together and deposits your spare cash in one or more banks. Banks hand the brokerage a hefty fee, and the brokerage hands you some crumbs. For any given investor, a few dollars from dividends or interest income don’t amount to much. Rolled together with idle cash from thousands of other investors, they can add up to millions.

Morgan Stanley. Ameriprise. E-Trade. If you dig through Schwab’s disclosure, you’ll see them state that “In setting interest rates, the affiliated banks may seek to pay as low a rate as possible”. Nice.

Default options often prey on your inattention and laziness. Here are some ways to avoid the low interest rates of the bank sweep accounts.

  • Explore all your sweep options. Some places give you multiple alternatives for your cash sweep. For example, Fidelity has Fidelity Government Money Market Fund (SPAXX), Fidelity Treasury Fund (FZFXX), and FCASH. The two funds have SEC yields over 1.5% right now, while FCASH earns only 0.25% on balances under $100,000.
  • Keep your cash accounts empty automatically. You can set up automatic dividend reinvestment, or perhaps an automatic deposit of dividends into a high yield savings account. That should keep most of your interest and dividends from piling up as cash.
  • Manually reinvest often or transfer to alternative funds. Keep an eye on your cash balance, and invest it as soon as possible into stocks, bonds, or a higher-yielding money market fund alternative. Some accounts offer a text alert if you balance exceeds a certain amount like $1,000.
  • Move your assets to another firm. Vanguard still has a decent sweep option (VMMXX, see below). Fidelity still has two decent money market sweep options as well (SPAXX and FZFXX).

Vanguard isn’t incentivized to play these interest-skimming games. Vanguard’s only sweep account nowadays is the Vanguard Federal Money Market fund due to new regulations (read more here). Vanguard used to have better options as the default account, but at least the Vanguard Federal Money Market fund still earns a decent SEC yield of 1.87% (as of 8/8/18). If you want, you can still move money manually into the Vanguard Prime Money Market fund, Vanguard Municipal Money Market funds, and the Vanguard Treasury Money Market fund which may do better on an after-tax basis.

On the flip side, if you are individual stock investor, this is why higher interest rates are good for brokerage firms like Schwab. If you believe in the future of low-cost index funds, Fidelity and Vanguard are not publicly-traded, but you can become a shareholder in Schwab. Heck, Schwab has even set up their “free” robo-advisor to profit from higher interest rates due to a sizable cash allocation. (I do not hold Schwab stock at the time of this writing, but it is on my watchlist.)

Bottom line. Check the interest rate on your brokerage sweep account – It might be a lot lower than you think. Consider taking action.

Filed Under: Banking, Investing
Last updated: August 9, 2018

Should I Break My Bank CD Early and Pay The Early Withdrawal Penalty?

August 6, 2018 By Jonathan Ping 1 Comment
“The editorial content on this page is not provided by any of the companies mentioned, and has not been reviewed, approved or otherwise endorsed by any of these entities. Opinions expressed here are author's alone.”

Interest rates continue to rise, and holders of existing certificates of deposit (CDs) may be wondering if it is a good idea to break their current CDs in order to take advantage of a new higher rate. Most CDs impose an early withdrawal penalty if you take money out before the CD matures. But the new rate is good enough, you might breakeven soon. This question is actually not that simple, as there are a few potential variables involved:

  • Existing CD: interest rate, maturity date, and early withdrawal penalty?
  • New CD: interest rate, maturity date, and early withdrawal penalty? Which term length is best?
  • How special is the new CD offer? Is it likely you’ll get the same rate in few months?
  • Future CD rates? What if the terms actually get better in the future?
  • Judgement date? One option may win after 2 months, but another might win after 1 year. What is the date of breakeven?

You can get an idea of the most recent top rates in my monthly interest rate roundup. All that said, here are two resources that can help you make the decision.

DepositAccounts has a simple CD Calculator that asks for the existing CD rate/length/penalty information but only the rate on the new CD. The calculator makes the simplifying assumption that your judgement date is the maturity date of the existing CD.

There are some potential issues, though. What if your new CD has a high interest rate but lasts another 5 years and has a huge early withdrawal penalty? You may come out ahead for the moment, but you’d be locking yourself in for another long period. There are scenarios where I might not agree with the conclusion given by this calculator.

The Finance Buff has a more detailed CD Calculator that requires more inputs and a bit of guessing. You will need to supply the new CD rate/length/penalty information and also guess the future rates when your existing CD matures. This calculator is more complex but gives you a more nuanced view of what happens both (1) when your existing CD matures and (2) when your new potential CD matures. Now you have essentially two judgment dates instead of one.

If a coder was willing to spend a little time, they could probably create a better calculator with a chart that would show visually how the interest (taking into any withdrawal penalties) would change over time for two (or more) different CD options. Essentially, it could compare results across multiple judgment dates. You could also calculate the breakeven date. (Future project, but if you have already done it, let me know and I’ll link to it here.)

Bottom line. If it were me, I’d use both of the two calculators above and get a rough answer. If it’s a slam dunk, then go for it. If the answers are close, I would probably only break the CD if it was an especially good promotional rate that was higher than the competition, like the expired Sharonview 4% APY CD earlier this year. Otherwise, the markets are suggesting that rates are likely to keep rising. I’d also make sure the new CD is not too long for my needs and that is has a reasonable early withdrawal penalty.

Filed Under: Banking
Last updated: August 6, 2018
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