Archives for November 3, 2014

Cash Reserves & Best Interest Rates Update – November 2014

“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.”

percentage2Our family keeps a full year of expenses put aside in cash reserves; it provides us with financial stability with the additional side benefits of lower stress and less concern about stock market gyrations. Emergency funds can actually have a better return on investment than what you see on your bank statement.

Interest rates are still depressingly low, and I haven’t made any changes to how I hold my cash reserves since my last update in June. However, there are still better options out there for cash stuck in a too-big-to-fail megabank savings account paying 0.000001%.

Best Currently Available Interest Rates

If I wasn’t already invested as outlined at the bottom of this post, here are the FDIC-insured or government-backed opportunities that I would be looking into based on my needs.

  • Everbank Yield Pledge Money Market and Interest Checking account both offer 1.40% APY guaranteed (up to $50k each) for the first 6 months for new accounts. Since it is fixed, this is essentially a 6-month CD with a higher rate than any other 6-month CD rate out there and with no early withdrawal penalty to worry about.
  • “Series I” US Savings Bonds offer rates that are linked to inflation. “I Bonds” bought right now will earn 1.48% total for the first six months, and then a variable rate based on ongoing inflation after that. You must hold them for a year, and if you redeem them within 5 years you lose the last 3 months of interest. While future rates are unknown, the net rate after a year is still likely to be competitive with top 1-year CD rates. More info here.
  • Rewards checking accounts pay above-average interest rates, but only if you to jump through many hoops. Make a mistake and you’ll forfeit your interest for that month. Rates can also drop quickly, leaving a “bait-and-switch” feeling. If you’re up for it, a recent example is Consumers Credit Union where you can earn up to 5.09% APY on up to a $20k balance, although 3.09% APY is easier to achieve unless you satisfy a long list of requirements. Good news is the rate is guaranteed until August 2015.
  • Certificates of deposit. If you have a large cushion, it’s quite likely to just sit there for years. Why not put some money in longer-term investments where you can still take it out in a true emergency and pay an early withdrawal penalty. Synchrony Bank (formerly GE Capital Retail Bank) is offering a 5-year CD paying 2.30% APY for $25k+ balances (2.25% APY for $2k+) with an early withdrawal penalty of 180 days interest. For example, if you withdraw from this CD after 2 years and pay the penalty, your effective rate earned will still be 1.72%.
  • Willing to lock up your money for 7 years? Tobyhanna Federal Credit Union has a 7-year CD paying 3.04% APY, however the early withdrawal penalty is a full 2 years of interest. More info at DepositAccounts.com.
  • How about two decades!? “Series EE” US 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 0.50% APY). You really want to be sure you’ll keep it for 20 years.

Where’s My Money At?

Here’a quick recap of how I have our cash reserves split up. Keep in mind that most of the rates that I locked in are no longer available, but I did blog about them at the time.

  • Ally Bank Online Savings paying 0.90% APY (as of 11/3/14) which also serves as a no-fee overdraft option to my Ally Interest Checking, that way I can keep a minimal balance in checking. Ally checking also has unlimited ATM fee rebates and no fees. I know there are some savings accounts paying a tiny bit more, but not worth the trouble for less than 0.1% difference on $10,000.
  • Ally Bank CDs earning between 1.84% and 3.09% APY. These are old 5-year CDs with a short 60-day interest penalty. Current Ally CD rate of 11/3/14 is 2.00% APY for 5-Year CD with 150-day early withdrawal penalty.
  • PenFed CDs earning 5% APY. Long gone, although earlier this year PenFed did offer 5-year CDs at 3% APY (no longer available). Current rates are only so-so.
  • I also bought several US savings bonds that I now consider part of my retirement portfolio as opposed to cash reserves, as I don’t think I’ll ever want to cash them in before full maturity. More info below.

All rates are believed current as of writing, 11/3/14.

Savings I-Bonds November 2014 Interest Rate Officially Announced

“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.”

savbonds4Update: The official announcement states that effective November 1st, the new fixed rate on Series I savings bonds is 0.0%, down from the previous 0.1%. The variable inflation-indexed rate is 1.48% (as was predicted). Thus, buying a new I Bond between November 2014 through April 2015 will earn a composite rate of 1.48% for the first six months, and after that 0% the current inflation-indexed rate updated every 6 months.

Original post below:

Savings bonds offer a unique opportunity for individuals to buy an investment that is closed to large institutional investors. Compare the rates on these savings bonds to what you’re earning on your FDIC-insured bank deposits or even your TIPS and bond mutual funds, and you may find them a good addition to your portfolio.

Since inflation-linked savings bonds (“I bonds”) are based on CPI numbers announced two weeks earlier, we can make predictions about upcoming savings bond rates before their official announcement. This also allows us the opportunity to know exactly what a current bond purchase will yield over the next 12 months, instead of just 6 months.

New Inflation Rate
March 2014 CPI-U was 236.293. September 2014 CPI-U was 238.031, for a semi-annual increase of 0.74%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be approximately 1.48%. The new fixed rate won’t be announced until November 1st (speculation below). 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 different.

Purchase and Redemption Timing Reminder
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 though, since if you wait too long your effective purchase date may be bumped into the next month.

Buying in October

If you buy before the end of October, the fixed rate portion of I-Bonds will be 0.1%. You will be guaranteed the current variable interest rate of 1.84% for the next 6 months, for a total rate of 0.1 + 1.84 = 1.94%. For the 6 months after that, the total rate will be 0.1 + 1.48 = 1.58%. Let’s say we hold for the minimum of one year and pay the 3-month interest penalty. If you buy on October 31st, 2014 and sell on October 1st, 2015, you’ll earn a ~1.49% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. That is better than any 1-year bank CD that I can find right now, keeping in mind the liquidity concerns and the purchase limits. If you hold for longer, you’ll be getting the full 1.76% over the first year.

Given the combination of current low rates and the fact that you lose the last 3 months of interest (again, for holding less than 5 years), it might be better to wait long enough to grab 12 full months of interest by holding for 15 months (14 buying late). If you buy on October 31st and hold until January 1st, 2016, you’d achieve an annualized return of ~1.51% over 14 months. (Check my math.)

Buying in November

If you wait until November, you’ll give up the opportunity to lock in the 0.1% fixed rate from April. Instead, you will get 1.48% an unknown fixed rate for the first 6 months. The next 6 months will be the sum of the same unknown fixed rate an unknown rate based on future inflation. If there is high inflation for the next 6-month period, buying in October may get you a higher rate sooner. My best guess for the fixed rate is that it will be somewhere between 0.0% and 0.2%.

As for my decision, I already maxed out my contribution limits for 2014 back in April to lock on the 0.2% fixed rate.

Existing I-Bonds
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 + variable rate. Even at a low or even zero fixed rate, your existing savings bonds are paying more than current savings accounts and will continue to be hedged against inflation, so weigh carefully whether or not to redeem them.

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. I’m keeping all of mine for the foreseeable future, due to their tax deferral possibilities and other unique advantages.

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