Best Interest Rates on Cash – July 2020

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

The Fed rate is still at zero, which has bought us back to the time when anything above 2% APY is newsworthy (and there ain’t much news). The only reason to pay attention is that being willing to switch bank accounts can still beat out Treasury bonds and/or brokerage cash sweep options that also pay nearly zero.

Here’s my monthly roundup of the best interest rates on cash for July 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 7/5/2020.

High-yield savings accounts
While the huge megabanks make huge profits while paying you 0.01% APY, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • Patriot Bank has the top rate at the moment at 1.40% APY guaranteed until 8/31/2020 (last month it was 1.75% APY guaranteed until 7/31/20). I wouldn’t count on anything after the guarantee, as nearly every place else is below that with most likely headed back to the ~1% APY range. There are several other established high-yield savings accounts at above 1% APY for now.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile 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 and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 1.00% APY with a $500 minimum deposit. Ally Bank has a 11-month No Penalty CD at 0.95% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 0.75% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Pen Air Federal Credit Union has a 12-month CD at 1.25% APY ($500 min). Early withdrawal penalty is 180 days of interest. Anyone can join this credit union via partner organization ($3 one-time fee).

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are NOT FDIC-insured and thus come with a possibility of principal loss, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 0.18% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.12%. 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 1.18% SEC yield ($3,000 min) and 1.28% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 1.10% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 1.19% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. Note that there was a sudden, temporary drop in net asset value during the recent market stress.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section probably isn’t very interesting as T-Bills are yielding close to zero!

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 7/2/2020, a new 4-week T-Bill had the equivalent of 0.13% annualized interest and a 52-week T-Bill had the equivalent of 0.16% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 0.09% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -.02% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

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 2020 and October 2020 will earn a 1.06% 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 2020, 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. I don’t personally recommend nor use any of these anymore.

  • The only notable card left in this category is Mango Money at 6% APY on up to $2,500, along with several hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

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. If you want rates above 2% APY, this is close to the only game in town.

  • Consumers Credit Union Free Rewards Checking (my review) still offers up to 4.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. The Bank of Denver has a Free Kasasa Cash Checking offering 3% APY on balances up to $25,000 if you make 12 (temporarily 6 due to COVID-19) debit card purchases and at least 1 ACH credit or debit transaction per statement cycle. If you meet those qualifications, you can also link a savings account that pays 2% APY on up to $50k. Thanks to reader Bill for the tip. Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. 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 (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • Georgia’s Own Credit Union has a 5-year certificate at 1.70% APY ($500 min), 4-year at 1.50% APY, 3-year at 1.45% APY, and 2-year at 1.25% APY. Beware that the early withdrawal penalty for the 5-year is 450 days of interest. Anyone can join via partner organization for one-time $10 fee.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Vanguard has a 5-year at 0.80% APY right now. Be wary of 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 early withdrawal penalties. Vanguard has a 5-year at 0.95% APY right now. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique 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. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. As of 7/2/2020, the 20-year Treasury Bond rate was 1.20%.

All rates were checked as of 7/5/2020.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

SoFi Money $25 Bank Bonus, $50 Stock Bonus, 10% Cashback Promo

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

New 10% cash back categories. If have you a SoFi Money account, don’t miss that they are offering earn 10% cash back on select Grocery: Whole Foods, Trader Joe’s, Instacart and Subscriptions: Netflix, Disney+, Spotify when you pay with SoFi Money from 7/1 through 9/30. Max cash back is $50 for Grocery ($500 in purchases) and $50 for Subscriptions ($500 in purchases). I like that they keep coming up with new bonuses.

If you opened a SoFi Money account prior to 6/9/2020, this is available to all members. If you opened a SoFi Money account after 6/9/2020, you need $500+ in monthly deposits (from any source, bank transfers okay) in order to qualify for the 10% cash back program. Looks like they added a new hoop with a grandfather clause, although you would need to add in some money to take full advantage of this promotion anyhow. See app for details.

Original post regarding bonuses for new accounts:

SoFi (“Social Finance”) has expanded from students loans into a cash management and stock brokerage account. They’ve also updated their bonuses for trying them out, and if you have a spouse/partner, you can refer each other (in addition to other friends and family) to grow the total bonus.

SoFi Money (Cash Management Account)

  • Get a $25 cash bonus when you open a new account and fund the account with at least $500 (from any source). This is my referral link. The referrer gets money too, so thanks if you use it!
  • After joining, you can also refer your own friends and family. You will get $50 as the referrer and they will get $25.
  • FDIC-insured. No account fees. No minimums.
  • Free debit card with unlimited reimbursed ATM fees.

SoFi Invest (Brokerage Account)

  • Get a $50 of your choice of stock when you fund your account with at least $1,000. This is my referral link. The referrer gets $75.
  • After joining, you can also refer your own friends and family. You will get $50 as the referrer and they will get $50.
  • SoFi Invest allows fractional shares (“stock bits”), so you can get exactly $75 worth of Apple, etc. Trade as little as $1 at a time.
  • Sample stocks are Apple, S&P 500 ETF, or Berkshire Hathaway.
  • No trading fees.

The opening process is quick and simple. Find your referral links to refer others in the SoFi app after joining. You can open, apply, fund online and be poking around the app all in the same day.

Bottom line. SoFi is offering cash and free stock bonuses for trying out their new financial products. They can quickly add up to easy money for a minor amount of effort. A couple where one person refers the other can earn hundreds in total bonuses. They have also been consistently offering new bonus categories and various promos to keep you interested.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

In Defense of Working One More Year (OMY)

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

In early retirement discussion forums, you’ll often see the term OMY, which refers to people who have reached their calculated retirement savings target, but decide to keep working “One More Year”. Sometimes that one more year becomes two more years, three more years, and so on. This leads to OMY being seen as an irrational behavioral quirk like hedonic adaptation. However, are the potential benefits of working one more year being under-appreciated?

In the Medium article How important is asset allocation versus withdrawal rates in retirement?, EREVN (he lives in Vietnam) compares the power of picking the optimal asset allocation vs. saving more money. Investors often worry about whether they own the right mix of stocks and bonds. Do you own enough stocks, as to get a high enough return? Do you own enough bonds, so you don’t freak out during a market drop?

EREVN points out that historically, the optimal asset allocation in terms of having your portfolio last the longest is almost always 100% stocks. (98% of the time.) Even including the other 2%, how much of a benefit is it to hold the optimal asset allocation?

Read the entire article for full understanding of the assumptions taken, but here is the summary of his experiments. We usually optimize asset allocation based on highest return, but that’s not exactly the same as withdrawal rate. Note: Whenever you see “4% withdrawal rate”, that’s the same as having 25 times your annual expenses. 3% withdrawal rate = 33.3x expenses, 2% withdrawal rate = 50x expenses, etc. I added the stuff in the brackets [].

Even with perfect hindsight, choosing the best possible asset allocation is only equivalent to going from a 4% withdrawal rate to a 3.7% or 3.8% withdrawal rate. [25x expenses to 26x or 27x expenses.] In other words, saving 1 or 2 extra years of expenses dominates getting the asset allocation decision perfectly correct. In reality, we don’t have perfect hindsight and our asset allocation will be sub-optimal.

The powerful conclusion:

Instead of stressing about trying to pick “the right” asset allocation, you’re better off picking anything reasonable and ignoring every other asset allocation internet discussion for the rest of your life… and then working an extra six or twelve months to pad out your retirement fund before retiring.

I like the paring of working one more year and being able to drop the worry about asset allocation now and forever! You don’t want to work forever, but this does make OMY have multiple benefits (existing portfolio can grow another year, might even save more, stop worrying about asset allocation).

Here are a few related posts on “Saving More vs. XXX” from the archives:

Image via GIPHY.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Don’t Expect Too Much From Exotic Asset Classes

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

If you like having a complicated portfolio and owning exotic asset classes for diversification, you might want to prepare yourself before reading Skating Where the Puck Was: The Correlation Game in a Flat World by William Bernstein. Most of the exotic classes you’ve ever thought about owning will be struck down:

  • Commodities futures? – disaster.
  • Private equity? – nope.
  • Hedge funds? – don’t bother.
  • Gold? – sorry, even the Permanent Portfolio would have been better off historically without gold if you measure since 1980 (after going off gold standard).

The basic premise is “Rekenthaler’s Rule”: If the bozos know about it, it doesn’t work any more.

Even international stocks are not nearly as useful a diversifier as they used to be. The book included a chart of the correlation between the S&P 500 (developed large-cap US stocks) and EAFA (developed large-cap international stocks), but I found a more recent one from Morningstar. International stocks used to offer high returns and low correlations, the ideal asset class to add to any portfolio! Not so much recently:

Now, there are still reasons to invest in international stocks – primarily the “big picture” deep risk of investing in a single country over a long period of time. But your short-term volatility is not going to be dampened much anymore.

So, what is left?

The best alternative asset class for the average investor may be in truly private investments, such as already mentioned, owner-managed (the owner being you) residential and commercial real estate in distressed markets, or in other private businesses in which you have special expertise.

I would be careful with this too, as there are many bad (quiet) real estate investors and failed/struggling businesses that you don’t hear about. Be sure you really have “special expertise”. However, one benefit of owning private real estate or a private business is that you don’t get daily price quotes. Nobody is going to tell you “Well, if you sold TODAY, the best price you could find is 50% of what you could have gotten last month! Tomorrow, it could only be 40%! Do you want to sell?!”. This means less likelihood of panic selling and more long-term investors.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

The Rare Stock Market Do-Over

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

It used to be that you were supposed to use your experience from the 2008 stock market drop to help understand your true risk tolerance. Well, now we have a more recent reference point in the 2020 stock market drop. Allan Roth reminds us that thanks to the unprecedented recovery, we have A Rare Second Chance to Protect Nest Egg Savings.

Remember that the purpose of money is to give you choices in life. I’ve seen many people take unnecessary risks with their money and have to either go back to work or drastically cut back on their lifestyle. So use this second chance the market gave you to assess how much risk you want to take with your financial freedom. Let me repeat — don’t blow this second chance.

I’m still struggling a bit with this as it’s often hard to separate if you’re doing something because you have learned something new about yourself and/or permanently changed your investment philosophy, or are you just responding to what happened recently? I certainly don’t know what is happening next, but I am definitely nervous.

If you are near retirement, it is always a good idea to check if you’ve won the game and can stop playing with part of your portfolio.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

William Bernstein and Safe Withdrawal Rates

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

A recurring theme in investing is that you start out learning the simple basics, then you feel like you can optimize things and spend a lot of effort trying to do so, and eventually you realize that simple is probably just fine. No matter how closely you mine the past, you can’t predict the future. As the Buffett quote goes, “If past history was all there was to the game, the richest people would be librarians.” That’s what came to mind when I read William Bernstein on safe withdrawal rates in retirement:

Even the most sophisticated retirement projections contain so much uncertainty that the entire process can be summarized as follows: Below the age of 65, a 2% spending rate is bulletproof, 3% is probably safe, and 4% is taking chances. Above 5%, you’re taking an increasingly serious risk of dying poor. (For each five years above 65, add perhaps half of a percentage point to those numbers.)

Source: The Ages of the Investor: A Critical Look at Life-cycle Investing.

Something to keep in mind when you become obsessed about getting from a 98% success rate to a 99% success rate on a simple retirement calculator from Vanguard or a fancy one like FIRECalc. (Not that I’ve done that, ever, of course…)

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Best Interest Rates on Cash – June 2020

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards and may receive a commission. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned.

Another month of slight rate drops, although bank accounts can still beat out Treasury bonds and/or brokerage cash sweep options by a significant margin.

Here’s my monthly roundup of the best interest rates on cash for June 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 6/2/2020.

High-yield savings accounts
While the huge megabanks make huge profits while paying you 0.01% APY, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile 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 and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 1.20% APY with a $500 minimum deposit. Ally Bank has a 11-month No Penalty CD at 1.20% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 1.15% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Lafayette Federal Credit Union has a 12-month CD at 1.61% APY ($500 min). Early withdrawal penalty is 180 days of interest. Anyone can join via partner organization for one-time $10 fee. Note that you will have to park $50 in a share savings account while a member.

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are NOT FDIC-insured and thus come with a possibility of principal loss, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 0.32% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.20%. 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 1.61% SEC yield ($3,000 min) and 1.71% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 1.87% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 1.83% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. Note that there was a slight drop in net asset value during the recent market stress.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section probably isn’t very interesting as T-Bills are yielding close to zero!

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 6/2/2020, a new 4-week T-Bill had the equivalent of 0.12% annualized interest and a 52-week T-Bill had the equivalent of 0.17% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 0.57% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -.04% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL. Expect that GBIL yield to drop significantly as it is updated.

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 2020 and October 2020 will earn a 1.06% 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 2020, 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. I don’t personally recommend nor use any of these anymore.

  • The only notable card left in this category is Mango Money at 6% APY on up to $2,500, but there are many hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

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. I don’t use any of these anymore.

  • Consumers Credit Union Free Rewards Checking (my review) still offers up to 4.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. The Bank of Denver has a Free Kasasa Cash Checking offering 3% APY on balances up to $25,000 if you make 12 (temporarily 6) debit card purchases and at least 1 ACH credit or debit transaction per statement cycle. If you meet those qualifications, you can also link a savings account that pays 2% APY on up to $50k. Thanks to reader Bill for the tip. Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. 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 (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • Lafayette Federal Credit Union has a 5-year certificate at 2.02% APY ($500 min). Beware that the early withdrawal penalty is 600 days of interest! Anyone can join via partner organization for one-time $10 fee. Note that you will have to park $50 in a share savings account while a member.
  • Pen Air Federal Credit Union has a 5-year certificate now at 1.85% APY ($500 minimum). Early withdrawal penalty is 180 days of interest. Their other terms are competitive (relatively), if you want build a CD ladder. Anyone can join this credit union via partner organization ($3 one-time fee).
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Vanguard has a 5-year at 1.05% APY right now. Be wary of 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 early withdrawal penalties. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique 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. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. As of 6/2/2020, the 20-year Treasury Bond rate was 1.24%.

All rates were checked as of 6/2/2020.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

The Role of Luck in Long-Term Investing, and When To Stop Playing The Game

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I am re-reading a series called “Investing for Adults” by William Bernstein. By “Investing for Adults”, Bernstein means that he assumes that you already know the basics of investing and that he can skip to more advanced insights. There are four parts:

A commonly-cited part of the first book The Ages of the Investor is the question “Once you have won the game, why keep playing?”. If you have enough money to buy a set of safe assets like inflation-adjusted annuities, delayed (and thus increased) Social Security payments, and a TIPS ladder to create enough income payments for life, you should seriously considering selling your risky assets and do exactly that. (This is referred to as a liability-matching portfolio, or LMP. You can keep investing any excess funds in risky assets, if you wish.)

A wrinkle to this plan is that you won’t know exactly when the stock market will help make that happen. Before you reach your “number”, you’ll most likely be buying stocks and hoping they grow in value. Let’s say you saved 20% of your salary and invested it in the S&P 500*. How long would it take you to “win the game”?

Historically, it could be as little at 19 years or as long as 37. That’s nearly a two-decade difference in retirement dates! Same savings rate, different outcomes.

This paradigm rests on too many faulty assumptions to list, but it still illustrates a valid point: You just don’t know when you’re going to achieve your LMP, and when you do, it’s best to act.

If, at any point, a bull market pushes your portfolio over the LMP “magic number” of 20 to 25 times your annual cash-flow needs beyond Social Security and pensions, you’ve won the investing game. Why keep playing? Start bailing.

If you don’t act, the market might drop and it could take years to get back to your number again. This is one of the reasons why some people should not be holding a lot of stocks as they near retirement. Some people might need the stock exposure because the upside is better than the downside (they don’t have enough money unless stocks do well, or longevity risk), but for others the downside is worse than the upside (they DO have enough money unless stocks do poorly, or unnecessary market risk).

I find the concept of a risk-free liability-matching portfolio (LMP) much harder to apply to early retirement, as it is nearly impossible to create a truly guaranteed inflation-adjusted lifetime income stream that far into the future. Inflation-adjusted annuities are rare, expensive, and you’re betting that the insurer also lasts for another 50+ years if you’re 40 years old now. Social Security is subject to political risk and may become subject to means-testing. TIPS currently have negative real yields across the entire curve, and only go out to 30 years. (As Bernstein explores in future books, you’ll also have to avoid wars, prolonged deflation, confiscation, and other “deep risk” events.)

* Here are the details behind the chart:

As a small thought experiment, I posited imaginary annual cohorts who began work on January 1 of each calendar year, and who then on each December 31 invested 20% of their annual salary in the real return series of the S&P 500. I then measured how long it took each annual cohort, starting with the one that began work in 1925, to reach a portfolio size of 20 years of salary (which constitutes 25 years of their living expenses, since presumably they were able to live on 80% of their salary). Figure 11 shows how long it took each cohort beginning work from 1925 to 1980 to reach that retirement goal.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

M1 Finance Review: Custom Asset Allocation, Up to $1,500 Transfer Bonus

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Updated. As noted in my post on best online brokers, my favorite option in the now-crowded “robo-advisor” category is now M1 Finance. Here’s a quick rundown of what makes them different:

  • Fully customizable. You pick your own target asset allocation “pie”. (You can add ETFs or individual stocks.) You can simply copy one of the many model portfolios out there, or customize it as you like. You have full control! M1 handles the boring stuff, like rebalancing or dividing a $100 contribution across 8 different ETFs. Here is my pie which I named the My Money Blog Portfolio.
  • No commissions. Free stock/ETF trades with a low $100 minimum account size for taxable accounts and a $500 minimum for retirement accounts.
  • 0.00% management fee! Most robo-advisors charge an annual management fee of 0.25% to 0.50% of assets (or force you to own something bad, like artificially low-interest cash).
  • Free automatic rebalancing. M1 will rebalance your portfolio back to the target allocation for you automatically (for free). You don’t need to do any math or maintain any spreadsheets.
  • Fractional share ownership. For example, you can just set it to automatically invest $100 a month, and your full amount will be spread across multiple ETFs. Dollar-based transactions were one of the good things about buying a mutual fund, but it seems that ETFs are the future due to their lower costs and tax-efficient structure. Fractional shares solve this problem.

M1 Finance nearly checks off all the boxes of my brokerage wish list. While I’m with them, they do all the managing for me, according to my rules. But since I can choose the exact ETFs that they purchase, if I decide to stop their service down the line, I just end up with a brokerage account filled with ETFs that I can easily move elsewhere. I don’t have to sell anything. I suppose the only thing they could add would be to have the high availability of customer service of a huge company like Fidelity or Schwab. Otherwise, I really like their feature set and I contributed $1,000 of my Roth IRA contribution in order to try them out.

Transfer bonus extended to June 15th. Transfer a brokerage account or IRA to M1 before June 15th and earn up to $2,500. Details here. Here are the bonus tiers:

Here is a screenshot of the email:

Valid for individual taxable, joint taxable, and IRA accounts. Account value of the qualifying account must remain equal to, or greater than, the value after the net deposit was made (minus any losses due to trading or market volatility or margin debit balances) for 60 days.

How do they make money? As commissions shrink, this is the business model for pretty much all online brokers now:

1) Interest on idle cash (can be minimized as you can auto-invest all idle cash in the investment account)
2) M1 Borrow (margin loan interest)
3) M1 Spending (debit card generates fees for them)
4) Payment for order flow (same as Robinhood and TD Ameritrade)
5) M1 Plus (premium subscription that gets you higher interest rates and debit card cash back).

Bottom line. M1 Finance is a new brokerage account that acts like a free, customizable robo-advisor with automatic rebalancing into a target portfolio. I deposited part of my annual Roth IRA contribution with them.

Disclosure: I am now an affiliate of M1 Finance, and may be compensated if you click through my referral link and open a new account.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Vanguard Digital Advisor Services (VDAS) Review: Only Slightly More Expensive Than Target Date Fund

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Updated. Vanguard has increased the marketing and added some details about their new portfolio management service, Vanguard Digital Advisor Services (VDAS). Here is the new full PDF brochure. After reading through the entire brochure (again!), here are a few new things that I noticed:

Glide path is now more personalized. Instead of just having a single glide path for everything headed for retirement in the same year, VDAS will customize your asset allocation glide path depending on: your selected risk attitude, when you think you will retire, your assessed loss aversion (if any), marital status, if your portfolio has low or high single stock exposure, retirement savings rate, and expected retirement income.

Joint accounts with rights of survivorship are currently not allowed. This is expected to change in the future.

You may need to sell or move your existing investments first to enroll in VDAS. VDAS requires $3,000 specifically to be held in the Vanguard Federal Money Market Fund, which is their default cash sweep. In addition, your brokerage account can’t contain anything else. They want a clean slate of cash, and only then will they invest it for you. Most other robo-advisors don’t like to mix old assets either, but I expect that Vanguard will have a lot of potential customers with existing holdings. I was hoping they could somehow adjust for that.

Emergency savings goals. In the near future, you will be able to get guidance as to how much to set aside as emergency savings, and they’ll help manage that for you.

Here are the things I noted previously that still hold:

Key differences between the VDAS and VPAS:

  • Vanguard Personal Advisor Services (VPAS) – Both human and online communications. $50,000 minimum. 0.30% annual advisory fee (on top of ETF/fund expense ratios).
  • Vanguard Digital Advisor Services (VDAS). Online-only communication. $5,000 minimum for retail accounts ($5 minimum for 401k). Target 0.15% annual advisory fee (on top of ETF/fund expense ratios).

VDAS can work across multiple enrolled Vanguard accounts. (Eligible account types include: individual, joint accounts with rights of survivorship, traditional IRA, Roth IRA, 401(k), and Roth 401(k) accounts authorized by plan sponsors). If you have a Vanguard-managed 401k, you could then move your taxable and IRA balances over to Vanguard and have them manage everything together. Betterment and Wealthfront have a relatively tiny footprint in the 401k space. I suppose you could also just buy the same Target Retirement fund across all your accounts.

VDAS takes advantage of tax-efficient asset location, prioritizing tax-inefficient assets into IRAs and 401k plans. Wealthfront and Betterment will also do tax-efficient asset location, but again they are unlikely to manage your 401k so you’ll still have to do some work yourself. With an all-in-one Target Retirement fund, it’s the same everywhere and you can’t separate the stocks from the bonds.

VDAS will provide online financial planning tools where you enter your personal details to create a personalized, goal-based financial plan. Wealthfront, Betterment, and every other robo-advisor will do the same thing (using their own algorithms of course). These forward-looking charts are pretty to look at, but really it’s all just a big guess.

VDAS will only use these four Vanguard ETFs: Vanguard Total Stock Market ETF, Vanguard Total International Stock Market ETF, Vanguard Total Bond Market Index ETF, and Vanguard Total International Bond Index ETF. (401k accounts will be more flexible, working within the available investment options.) Retail accounts will not include any recommendations to purchase individual securities or bonds, CDs, options, derivatives, annuities, third-party mutual funds, closed-end funds, unit investment trusts, partnerships, or other non-Vanguard securities. When cash is recommended as part of the strategic asset allocation target (usually only for those close or in retirement), the Vanguard Prime Money Market Fund will be used.

That makes the basic ingredients of a VDAS portfolio the exact same as a Vanguard Target Retirement 20XX fund. It’s even possible that the asset allocation will be identical. However, it’s important to note for expense reasons (see below) that VDAS holds the cheapest ETF versions while the Target fund holds the most expensive Investor Shares.

VDAS is only about 0.05% more expensive than the equivalent Vanguard Retirement Fund. VDAS promises that the all-in fee (advisory + ETF expense ratios) will be 0.20% annually. Since the ETFs are only about 0.05%, that works out to a net advisory fee of 0.15%. Meanwhile, the all-in fee for the Vanguard Target Retirement fund currently varies from 0.15% to 0.12% because it holds the more expense Investor Shares of mutual funds. Vanguard has noted elsewhere that mutual funds are more expensive to maintain on their side, and so they charge more.

VDAS and VPAS both rebalance your portfolio within 5% bands. According to a previous article, VPAS checks your portfolio quarterly and then rebalances if a 5% threshold band is exceeded. According to this brochure, VDAS also rebalances only when an asset class (stocks, bonds, or cash) is off the target asset allocation by more than 5%. However, VDAS will check daily instead of quarterly. This isn’t a big deal to me, but an interesting difference to note. Rebalancing will be done in a tax-sensitive manner.

The Vanguard Target Retirement funds handle the rebalancing internally, and every other robo-advisor will have a similar rebalancing feature. Automated rebalancing is an important and sometime under-appreciated benefit of a managed portfolio over a DIY portfolio. Us DIY folks all think we’ll rebalance the same way without emotion, but sometimes… in times of stress… we don’t.

VDAS will only buy Vanguard ETFs, which means they won’t be doing any ETF tax-loss harvesting with similar pair of ETFs. (The legality of that practice has yet to be tested in court if its use becomes widespread.)

VDAS will not buy fractional shares of ETFs. A minor note, but an increasing number of brokers offer fractional shares, like M1 Finance. This can be helpful if you invest in smaller amounts, for example via dollar-cost-averaging with each paycheck.

Fee comparisons. The VDAS 0.15% advisory fee is very competitive. It’s cheaper than the base offerings of Betterment and Wealthfront of 0.25%. Schwab’s Intelligent Portfolios says it is “free” but from a cash drag perspective the effective fee is an estimated 0.12% (others estimate 0.20%). Betterment and Wealthfront have the head start in terms of technology and a modern design interface, but can Vanguard close the gap?

I was a bit surprised at how little VDAS costs more than a Vanguard Target Retirement fund. I have been a fan of Vanguard Target Retirement funds because they are basically a robo-advisor rolled into a simple mutual fund. But why are they still so expensive?

As DIY person, I would remind folks that you can always buy the exact same ETFs at any low-cost broker. A new broker M1 Finance offers free commissions, free rebalancing, and fractional shares. Now you have the same portfolio at an all-in cost of 0.05%.

Bottom line. Vanguard Digital Advisor Services is definitely going to make a dent in the robo-advisor field. The competition is far from over.

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Suze Orman’s Updated Financial Advice 2020

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The NYT has a new Suze Orman comeback piece called Suze Orman Is Back to Help You Ride Out the Storm. I’m old enough to feel nostalgia over the peak Suze Orman years, and it was interesting to read how some of her advice as changed:

Some of Ms. Orman’s advice has shifted since the Great Recession of a decade ago. The coronavirus has led her to the belief that having an emergency fund for food and health care is more important than concerns over debt. That’s why she’s telling people in financial trouble to scrape their money together and put it aside for emergencies, regardless of the damage it may do to a FICO score.

“Can you believe Suze Orman’s telling you to ‘please use your credit cards’?” she said on “Today.” “And only pay the minimum amount due. You might even want to call your credit card companies and ask them to expand your credit limit.”

Those who are in a slightly better situation frequently ask Ms. Orman what they should do about their stock holdings. Once upon a time, Ms. Orman was an evangelist for municipal bonds and an opponent of the stock market. But that changed as the interest on them descended to “almost nil,” as she put it.

So Ms. Orman’s recommendation now is to dollar-cost average in the stock market: purchasing a little bit every month, mostly in index funds, regardless of whether markets rise or fall.

I guess she has enough money now to feel less conservative these days – she went from muni bonds to sharing about her stock market timing prowess.

I don’t see any new TV episodes, but she does have an active podcast. I always thought her original slogan was rather clever: “People first. Then Money. Then Things.”

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.

Tastyworks Brokerage Bonus: 100 Free Shares, Worth $100 to $600

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Free stock shares are the trendy bonus nowadays – WeBull, SoFi, Robinhood, Public, and more – but how about 100 free shares? Tastyworks wants your attention by offering 100 free shares of a randomly-picked stock valued between $1 and $6 per share. That means the total value will be between $100 and $600, with an average total value of $200-$220. Offer now extended until 6/30/2020. Details below.

The odds of specific stock allocation is implemented as follows: there is a 70% chance of receiving Stock priced under $2.00 per share, and a 30% chance of receiving Stock priced over $2.00 per share. The value of Stock received will average $200-$220 USD based on the price of shares at which the Stock is purchased by tastyworks.

Tastyworks is a discount brokerage targeted at active options traders. They offer $0 comission stock trades and options commissions at $1 to open and $0 to close. That means a open/close roundtrip on options costs $1.00. TD Ameritrade, Schwab, Fidelity, and E-Trade all charge $0.65 per contract, which is $1.30 for open/close roundtrip. Thus, Tastyworks is 30% cheaper than the big brokers for options trading while also having the full fancy options interface.

For this promotion, you have to fund a new account with at least $2,000. You get the 100 bonus shares after a week, but you have to keep your $2,000 plus the value of the bonus shares for at least 3 months (otherwise they yank it back). See quoted fine print below:

The funds deposited to Qualified Customer’s account, plus the initial value of the Stock received (less any losses on the Stock) are required to remain in Qualified Customer’s account for a minimum of three months starting the day shares deposited into account, subject to extension from date of entry, before withdrawal in order for Qualified Customer to receive the value of the Stock (“Three Month Period.”) The value of stock Qualified Customer receives will be credited to their account upon deposit, but will be debited out of Qualified Customer’s account if the Three Month Period requirement is not met, and will not count toward Qualified Customer’s buying power until the end of the Three Month Period. Qualified Customers can sell their Stock once deposited into their account, but the proceeds will be subject to the foregoing Three Month Period requirement.

All that fine print aside, a $200 average payout on a $2,000 deposit with a minimum 3 month holding period is a good ratio. Just don’t go nuts with the options trading!

My Money Blog has partnered with CardRatings and Credit-Land for selected credit cards, and may receive a commission from card issuers. All opinions expressed are the author’s alone, and has not been provided nor approved by any of the companies mentioned. MyMoneyBlog.com is also a member of the Amazon Associate Program, and if you click through to Amazon and make a purchase, I may earn a small commission. Thank you for your support.