Where do you put your short term savings for the best interest rate?

[Molly]

Where does everyone park their short term savings for the best interest rate? I'm currently getting around 2% as an introductory rate, but that is going down next month.

[pinkytoe]

Ally. It goes up and down with interest changes but earns so much more than regular bank.

[Rogar]

I have a smaller amount in regular savings earning next to zero and also a one year CD at my local bank that's paying a little over 2%. I don't anticipate needing the money from the CD, but if I do it can be withdrawn with a little interest penalty. I have wondered what a money market with someone like Fidelity would pay.

[Tybee]

Another Ally user here.
Schwab money market pays virtually nothing; my Fidelity also pays nothing, .32% (just checked.)

Ally is paying 1.9 in savings, which is down from where it was, and cd's are rolling over lower, too, but much better than Schwab or Fidelity.

[rosarugosa]

I have an online savings account with Barclays Bank and they are currently paying 2.1%. They seem to be a little quicker to go up on their rates and slower to go down than Ally.

[dado potato]

I am getting an APY of 2% at "Marcus" (Goldman Sachs Bank).

Assuming a 25% marginal tax rate, the after-tax APY is 1.5%.

As of July 2019, compared with one year ago:
Headline CPI is up 1.8%.
Core CPI is up 2.2%.
CPI-W is up 1.58%.
Personal Consumption Expenditure Deflator is up 1.5%.

Thus, inflation, however it is measured, over the past year has been greater than or equal to the after-tax interest rates people can get on savings.

[Rogar]

I am getting an APY of 2% at "Marcus" (Goldman Sachs Bank).

Assuming a 25% marginal tax rate, the after-tax APY is 1.5%.

As of July 2019, compared with one year ago:
Headline CPI is up 1.8%.
Core CPI is up 2.2%.
CPI-W is up 1.58%.
Personal Consumption Expenditure Deflator is up 1.5%.

Thus, inflation, however it is measured, over the past year has been greater than or equal to the after-tax interest rates people can get on savings.

The current fixed rate for I-Bonds is .50% which is paid on top of the current rate of "inflation for urban consumers" (CPI-U). Tax on interest is deferred until you cash in and exempt from state taxes and you have to hold them for at least a year. There is a small interest penalty if you cash in before 5 years. Not exactly where you want liquid funds, but it's one way to at least try to keep up with inflation in a very secure investment.

I bought a small amount back when the fixed rate was 1.0%, and have never regretted it.

[dado potato]

@Rogar,

For a longer-term holding period, I buy my limit of I Bonds at Treasury Direct annually. I believe Molly was asking about "short-term" savings, and I Bonds do not allow redemption within a year of purchase, so I would not say they are appropriate for "short term". I think you are right about I Bonds... not exactly liquid.

[Molly]

Can you tell me more about I Bonds? How do they differ from CDs?

[Rogar]

Can you tell me more about I Bonds? How do they differ from CDs?

Yes Dado, I- bonds are not a short term liquid investment. I mentioned it since you were talking about how to keep up with inflation. I just think they are a decent safe investment especially when interest rates are low and inflation is typical, but you pretty much have to hang onto them for at least a year.

I-bonds differ from CDs a number of ways, but one main difference is that the return is calculated every six months based on the going rate of inflation plus a small fixed rate premium, rather than just one fixed rate for the duration like a CD. And at least until recently inflation and subsequent I-bond returns have given a little larger return than my short term CD's. The return may be small, but at least as long as you hold them you are assured to at least keep even with inflation, at least pre-tax. If at some time in the future interest rates look more attractive with CDs or other interest paying savings, you can always cash out as long as you've had them at least a year. I don't know if Dado would add more, the the details are slightly complicated and I think the expert references explain it better than I could.

https://www.investopedia.com/terms/s/seriesibond.asp

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm

[dado potato]

One other thought on I Bonds...
the US Treasury sets the fixed rate portion (at their sole discretion, they do not disclose how they decide.) They use a publicly disclosed method of calculating the variable rate portion, based on CPI-U, reset every 6 months. There is no cap on the variable rate portion, so, hypothetically, if we have runaway inflation in the CPI-U, the I bonds will compound at that inflation rate, increasing every 6 months. To that extent, an I Bond is a hedge against inflation, backed by the full faith and credit of the United States.

Surveys indicate that the public does not expect inflation. Many commentators are of the opinion that the bond market is signaling a recession ahead. It is hard to find a commentator who says savers need to prepare for runaway inflation in consumer prices. However, since August 15, 1971 the global monetary system has consisted entirely of fiat money. The purchasing power of fiat money (US Dollars and all others) steadily declined. Permanent inflation has been generally accepted by central banks, such as the Federal Reserve. Central bankers say they are not content with "disinflation" less than 2%. The "Great Inflation" of the 1970s was characterized by double-digit annual increases in the CPI. I cannot say with certainty that the CPI will never again increase at double-digits.

[jp1]

However, if inflation does again reach double digit levels then the fed will be forced to raise interest rates and interest rates of all sorts of financial prodicts available to the public will rise. Back in the late 70’s my father bought several 30 year treasuries at 15% interest. Surprisingly they never got called so he collected that rate for the full 30 years.

[Tybee]

Where was he holding these JP1? There wasn't Treasury Direct in the 70's.

[jp1]

Where was he holding these JP1? There wasn't Treasury Direct in the 70's.

I have no idea. He bought them wherever one bought treasuries back then.

[Rogar]

My father had one of those older treasuries, too. I think there was a time before the digital age when you could buy paper bonds and also redeem them through a bank.

[kib]

I've always wondered if the flexibility of the CPI "bread basket" isn't manipulated to make inflation appear lower than it really is. Personally a fan of insured muni bonds. I've also discovered the (not really) joys of reward checking accounts - if you're willing to jump through hoops at rather mediocre online banks and put up with switching banks if the terms change, you can do pretty well. This site is good for picking out good deals on standard banking products - I'm currently earning 3.93% on my checking / short term savings balance. (their "earn" column is based on a balance of $5,000, how much you can theoretically earn is capped by the deposit limit.) https://www.depositaccounts.com/checking/reward-checking-accounts.html (https://www.depositaccounts.com/checking/reward-checking-accounts.html)

[dado potato]

In my experience, selected municipal bonds have performed quite well.

MUB, essentially an index of muni bonds, reached an intraday high of 115.42 on August 15, 2019. I believe the demand for municipal bonds is part of a tendency for investors to "chase yield" in response to the Federal Reserve policy (suppressing interest rates generally).


With municipal bonds there is a risk that prices will drop while you own them. Generally the longer the period to maturity the greater the price fluctuations will be.

[iris lilies]

Re: municipal bonds. Some years ago when my employer, the public library, issued bonds for the purpose of raising money to renovate a major building, I thought it would be fun to buy some of those bonds but I had no idea how to do it. So I told our Edward Jones guy about them and he went out and got them for us. That has been a good investment for bonds. Later he called us about another library bond buying opportunity for a suburban library system, and we bought those as well.

[kib]

In my experience, selected municipal bonds have performed quite well.

MUB, essentially an index of muni bonds, reached an intraday high of 115.42 on August 15, 2019. I believe the demand for municipal bonds is part of a tendency for investors to "chase yield" in response to the Federal Reserve policy (suppressing interest rates generally).


With municipal bonds there is a risk that prices will drop while you own them. Generally the longer the period to maturity the greater the price fluctuations will be.
I try to buy bonds that are both under par and insured. (Quite a challenge lately). And I base my purchases on yield to worst and yield to maturity, not coupon rate. So basically I know my bond may not be worth what I paid for it at maturity but I know what I received over time. - I wouldn't recommend individual Muni's for short term holding, but I don't love bond funds all that much ... I don't trust bankers. Did you know Ken Griffin, Ray Dalio and James Simons, top-earning fund managers, earned a collective 7.7 billion dollars last year? I mean personally recieved that much income, in one year. Guess who paid them. :~)

[dado potato]

I have bought individual muni bonds through a broker. There are certain types I will not consider, and I try to avoid municipalities with a publicized history of corruption. Also there is a limit how far down the scale of bond ratings I would go. I avoided bond funds because the future value is unpredictable, compared to holding an individual obligation until called or maturity, when the future value will be a certainty. When a bond trades at a premium, say 4 or 5% over par, I have taken profits on about 45% of my muni holdings... the premiums would of course drop to zero as maturity date approaches. Good Luck, @kib

[kib]

I agree, one of the reasons I like muni's is that I feel they have the potential to do real things to help real citizens. But I do try to screen for what I consider to be valuable uses and hopefully ethical municipalities, and I won't go below "a rating with an A in it". I've sold for as much as 18% over purchase price, in addition to getting steady interest all along, but my conundrum is what would I purchase instead that would give me as good an income stream, so for the most part I just sit on them. It's confusing to me that muni's And stocks And gold all seem to be selling for a premium ... aren't some of these supposed to be hedges against the others???

[dado potato]

In my case, after taking profits in munis, I wanted to reduce duration. I accepted that the after tax yield would be lower. The parking place I selected was a floating-rate etf, FLOT. As I recall, the duration is 0.15 years. The dividend will vary with changes in interest rates. If interest rates paid by banks drop, then I would expect the share price to remain about the same, but the dividends to be smaller. On the other hand, if interest rates rise from here, I would expect dividends from FLOT to increase.

I don't believe I or anyone else can accurately predict future interest rates. There could be surprises.

I agree that it has been a bull market in nearly everything. There are some exceptions, which a contrarian might want to consider with due diligence. I note there is pessimism around retail REITs and energy. This time of year, tax-loss selling of closed-end funds with energy-related portfolios may have created a buying opportunity for investors with a tolerance for risk.