Being my money blog and all, I inherently have a biased focus on the best places to keep own my money based on my own personal tax situation, time horizons, and existing accounts. So far I’ve mostly talked about the banks in my online savings accounts comparison, savings bonds, and Treasury bills. However, I do feel like I should point out that there are definitely some alternative options to safely ‘stash your cash’ that also offer good if not better interest rates depending on your own preferences. They include other online banks, bank CDs, brokerage taxable and tax-exempt money market funds:
Other Online Banks
In my savings account comparison, I only list banks that have no minimum balance requirements, mainly because I see that as a big draw to these accounts. If their rates drop, you can move your money out with a click of a button. However, there are definitely other options out there, such as GMAC Bank and AmboyDirect.
GMAC Bank offers a FDIC-insured money market savings account with a lot of good features:
Pros
Recently competitive interest rates, currently 4.75% APY
Limited check-writing ability(3 per month)
ATM Check Card with ATM fee rebates, up to $6 a month
Add external bank transfers easily
Cons
Hard credit check upon opening
$500 minimum to avoid fees
I personally have not opened an account here due to the minimum requirements and hard credit check as I already have a Premier Savings account at Presidential bank paying 4.75% APY as well, and I don’t need check-writing or ATM fee rebates. But, these are nice features at a great rate and perhaps worth considering.
Bank Certificates of Deposit (CDs)
With the interest rates hikes likely to stop soon or at least slow significantly, some longer term bank CDs may start to look appealing for those who don’t need immediate access to their money. Many times, you don’t even need to switch banks or open a new account. Some examples:
Capital One 360 – 12-month CD earning 0.40% APY.
VirtualBank – 6-month CD earning 5.00% APY.
Emigrant – 5.00% APY CD, anywhere from 9-months to 10 years
GMAC Bank – 12-month CD earning 5.30% APY.
Again, these aren’t the best rates at any bank, just an example of how you could easily gain a higher rate in exchange for locking up your cash for a longer term. Minimum opening balances and early withdrawal penalties will vary by bank.
Brokerage Money Market (MM) Accounts
For a while, money market funds at available at stock brokerages were lagging the top online savings account rates significantly. But now, they can be very competitive. Here are some examples and their recent yields after expenses:
Vanguard Prime Money Market – 4.59%
Fidelity Money Market Fund – 4.54%
Note that these are not FDIC-insured. However, they are very safe and are usually invested in short-term, high-quality investment like T-Bills. A brokerage is likely to back the money market fund with it’s own assets to preserve trust in the company rather than let it lose you money. Of course, sticking with a more well-known company is also a good idea.
For those in higher tax brackets or in high-tax states, tax-exempt funds can also be a good option. Here are some examples:
Vanguard Tax-Exempt MM Fund – 3.51% (Fed exempt)
Fidelity Tax-Free Money Market – 3.25% (Fed exempt)
Vanguard CA Tax-Exempt MM Fund – 3.42% (Fed & CA exempt)
Fidelity CA Municipal MM Fund – 3.21% (Fed & CA exempt)
Vanguard MY Tax-Exempt Money Market Fund – 3.46% (Fed & NY exempt)
Fidelity New York Municipal MM Fund – 3.16% (Fed & NY exempt)
Here is a nice CNN calculator to figure your own equivalent rate. It was made for bonds, but works for this too. (Note that it assumes state tax is fully deductible from federal taxes, which may not be the case for everyone.) For instance, if you were in the 28% Federal income tax bracket, 3.51% would be the same as a taxable savings account at 4.88%. This is also ignoring any AMT concerns.
So look around, lots of people want your cash!
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Are there any tax benefits in investing in treasury bills through treasury direct?
Current Annual Percentage Yield: 4.40%
Term: 12 Months
Initial Deposit: $3,000.00
Maturity Date: Jan 17, 2007
Early Redemption Policy: 3 months interest
Today’s Early Redemption Value: $2,974.32
Jonathan, is it worth breaking this CD and going for the 5.25% CD?
Ouch, that’s a harsh early withdrawal penalty, you actually lose principal? I bet it’s an ING CD. My first guess? Not worth it. But, let’s do some math, ’cause I like math 🙂
If you keep the CD, on 1/17/2007 you’ll have 3,000 x 1.0440 = $3,132, which you can reinvest however.
If you break it, today you’ll have $2,974. If you are talking about the ING Orange CD, they are compounded annually so APR = APY. 1/17 is ~69% of a year away. That’d give you $3081 on 1/17 and you’d have a few months left at 5.25% (good or bad, who knows).
So, I wouldn’t break it, . That’s what early-withdrawal penalties are designed to prevent :/
I’ve been thinking about putting some of my long-term emergency funds (we have enough to live *frugally* for two years in savings, so long-term is the second year’s worth) into loans at Prosper. A bit more risky than savings, CDs, or MM accounts, but the return can be a lot better. Still toying with the idea.
Why wouldn’t jigsawpuzzle get the 4 months interest he has already earned, plus the $2974?
It is true that no mutual fund is FDIC insured, but does it stand to reason that if a mutual fund is invested in primarily US treasuries or any other bond or some financial instrument “guaranteed” by the federal government, that is pretty much the same thing as merely going through the trouble of purchasing it directly yourself?
I don’t know if this is available to everyone, but I was recently sent an offer from Ford (shortly after buying a Mustang): http://www.fordcredit.com/interestadvantage
Interest rate looks very good (5.4+% as of 5/1/06) and has check writing capability, but is not FDIC insured. Seems to me the main risk is whether Ford will default on its debt obligations.
I’d be curious if anyone has used this sort of an account before as I am strongly considering opening one for myself.
Any good deals money making ideas lately?
Another place that I am putting a little bit of money is http://www.prosper.com
So far only have about $300 there just to try it out and see how things work. The term for all loans is 36 months, so the money is partially tied up for that length of time. The principal plus interest gets paid out a little each month, so the original loan amount doesn’t really get tied up for the whole time.
Currently I have 6 loans at $50 per loan with interest rates ranging between 9.95% for a AA credit rating borrower through 21.5 % for a B credit rating borrower.
So far I’d say that I wouldn’t put a lot of money here, but if you have relatively small amount that you want to play with, it can be kind of fun and hopefully proifitable (i.e., no one defaults on their loan).
Prosper and Bonds like the Ford advantage thing are fine, but they are not a place for you to store your cash. They are investments just like stocks or mutual funds, where you are taking on more risk in exchange for a better return.
I’m focusing on safe places to hold cash, with very minimal chance at losing principal.
Hi, Jonathan,
I’m wondering why would it be advantageous to put money into a money market fund as opposed to a savings account (which seems to give higher returns).
Great site; I’m new to all this personal finance stuff, and it’s enlightening reading all the great tips and advice on the site.
Thanks!
FYI, Etrade is offering a more compelling CD: 5.21% APY 6-month, 1000$ min
I’m glad you finally wrote about the GMAC money market for the readers.
Ivan, they are just another alternative, many people already have accounts at Fidelity or Vanguard and their rates are currently better than many banks such as HSBC Direct or Emigrant. Not everyone likes to open up multiple accounts to chase higher rates. (Of course, I am not one of those people.)
A good series of posts. I’ve been enjoying them a lot. T-bills sound very interesting if I had enough cash to buy them.
As the dollar tanks, consider putting your savings in something other than U.S. dollars.
Even if you’re making 5% you’re still losing money because inflation is actually around 7%-8% (based on Pre-Clinton C.P.I. measurements). In other words, there is no such thing as “core inflation.”
Consider buying a CD in another currency such as the Candadian dollar or the Euro. You can do that here:
http://www.everbank.com
Jonathan,
I’m curious if you or anyone else here has looked into some of the funky CD’s and accounts offered at Everbank. I may be oversimplifying what they’re offering as I haven’t done more than a quick read online, but they seem to have both CD’s and savings accounts that let you convert your money to another currency as a way to hedge against the value of the US dollar.
http://www.everbank.com/main.asp?affid=eb
If you click on currencies and then currency CD’s, you’ll see the different currencies have different rates, some that look better and some that look worse than a current equivalent term US CD. (Look at Iceland!) I don’t claim to understand all the risks, but for a personal finance nerd like me it is an interesting product… 🙂
Does anyone here have a GMAC account and use MS Money? Can you download the transactions? Do you have to manually log into the site to do so?
MS only lists “GMAC On Demand” on their http://www.microsoft.com/money/bankonline.aspx site.
GMAC’s FAQ has the following entry:
“Can I download my account information into Microsoft? Money or Quicken? ?
Yes! Simply follow the directions that can be found on your online account statement.”
I emailed them to ask and they responded “Thank you for contacting GMAC Bank. Currently our website is not compatible with Quicken. We are working on the issue and hope to have the problem fixed very soon.” That doesn’t answer my MS Money question, and it certainly doesn’t match what they claim in their FAQ.
Although I’m no expert on currency arbitrage, I think people should be careful about chasing foreign-denominated investments. For instance, Iceland has been regularly making the news lately about the precarious state of their banks (and economy in general), with many people a full-blown currency crisis is a distinct possibility in the not-so-distant future. There’s a reason why other currencies (sometimes) over higher rates of return – to offset the greater risk. Make sure you know whether you’re using your shortterm cash or your longer term investment funds before venturing abroad.
Yeah, changing currencies just swaps your original dollar inflation for Euro (or whatever) inflation risk + currency risk, since presumably you’ll have to convert back to dollars when you’re done. I’d stay away from the Icelandic Krona et al.
how come paypal isn’t mentioned on this site? They’re MM rate is currently 4.58% and everyone has a paypal account.
Why I Don’t Trust PayPal
PayPal is not a real bank or even mutual fund company, and can (and will) revoke access to your money at their discretion.
E*TRade Bank Money Market account currently offer 4.75% for 3 months.
Citibank E-savings account is now 4.75%APY.
Greetings Arcane Financial Web Addicts,
Considering this 6% cd at World Savings… tie up for 15 month… of where o where will the fed go?
http://www.worldsavings.com/servlet/wsavings/minisite/cdoffer-dynamic.html?source=SeChGoEH2495
See you in early retirement!!
ps I already live in Hawaii (not actually good for retirement saving)