Now that the Federal Reserve Board lowered the interest rate, it looks like we’re seeing the last of the 5.3% APY savings accounts, which appear to be a dying breed. I personally expect even these to disappear shortly; after all, why offer rates in the 5s when other banks are touting rates in the 4s quite happily?
This makes me sad and nostalgic for the better savings-rate days of yore, but also prods me into taking action.
I was mightily happy with the 6% interest rate I’d enjoyed on my FNBO Direct account up until September 28th of this year, when the company cheerfully announced their plummet to 5.05% APY.
Perhaps you might think me unreasonably happy with the 6% rate. To many readers, it’s not worth the hassle of switching accounts just for some chump change. But I’m one of the aforementioned chumps, you see, and to me, several hundred dollars I don’t have to work for on emergency fund money which was going to sit around anyway is a great thing.
Thinking about the after-tax rate does diminish my pleasure somewhat, but still, every last-day-of-the-month, my brain goes ca-ching when it runs down the roster of interest payments I’ve gotten. I threw the extra $460.34 I earned by keeping those funds in that high-yield savings account for 9 months right at my monstrous student loans, which helped to pay them off.
So today, while listening to my FNBO rep crow about their 5.05% APY on the phone, I took a nice big chunk of emergency fund money and stuck it in the highest-yielding CD I could find, 5.65% at Countrywide.
Countrywide offers the same 5.65% APY on both 6- and 12- month CDs, so before I hit “submit” on the application, I did spend some time playing Nostradamus. Would interest rates rebound by March? By September, leaving my funds off in their little electronic box not earning to their full risk-free potential?
I used the handy-dandy CD interest calculator at bankrate.com, and found that for $10,000 at 5.65% APY, a 6-month CD will pay $278 in interest and a 12-month CD, $565.
In the end, I settled on a 6-month CD for two reasons.
1. I believe that due to fallout from the subprime crisis, it’s going to be a long, hard winter, interest rates included. A year from now, I think the outlook might be a bit better, so I’m more willing to risk losing my extra “chump change” 6 months from now.
2. I know that I won’t need those funds for 6 months, but longer is hard to predict. I’m okay tying up that money for the short term, but in the long term, I might have other strategies for it, and I also am likely to need to replace my car in the Spring, so it’d be good to have cash at hand.
There’s a $10,000 minimum opening balance for the Countrywide CD, but I had that money thanks to some credit card arbitrage I’ve currently got underway on the Citi Professional Cash Card.
I know that credit card arbitrage can be risky, but for me, I’m equipped to pay the balance off at any time, so floating my $8,000 at 0% interest until the end of 2008 just allows me to earn interest on those funds. I basically pretend the money’s not there; besides paying the minimum each month, I do not think about the money or consider it part of my net worth or spending power.
And for me, that’s an important part of my saving strategy. As much as posisble, I try to make the arbitraged money become my money, which I do by paying down the balance owed to the credit card company with new money from my earnings rather than tapping the borrowed sum. I put that money somewhere to earn interest and refrain from touching it until the end of the arbitrage period, when it has acquired a little interest to boot.
Basically, I’m tricking myself into saving more money from my day-job because the monthly minimum credit card payment becomes another one of my bills. I’m actually forcing myself to pay myself first. And all the while, the $8,000 plus $2,000 of my own savings sits safely locked away, quietly earning.
I know that many people do credit card arbitrage and invest the funds, but I am comfortable only with no-risk investing of such monies, lest I not have the money to pay the balance off when it comes due. It is certainly something to be very careful about, but because the majority of my bills are online in Paytrust, I feel assured that I’ll never miss a payment.
Countrywide has a verification process I need to go through before my account is fully set up, but my 5.65% rate is locked in for the next ten days, so I will act quickly and make sure it’s confirmed and funded in time.
Come what may with interest rates, I feel satisfied having locked in a nice risk-free rate of return for a substantial chunk of my savings. I won’t earn a lot of interest overall, but at least I’m optimizing my earnings.
Image Credit: Sillygwailo
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I disagree with your usage of CDs. I actually had quite a sum in CDs until I reached a certain age, and now that they’re coming do, I’m putting them in the stock market. I played with options for a bit and almost doubled what I put in, and I’m taking another 75k cd and putting it into 20 shares of berkshire hathaway class B. With a growth of 26% in the last year and 78% over the last 5, I believe I’m gonna do a lot better than I would if I had just renewed the CD.
Banks are for those with poor investment plans.
Oh man, I come off as arrogant and stuff and then I misspell due. Sorry!
I think it is a wise move to use the CDs for your situation. You are dealing with an indeterminate time period and don’t know when you will need the money. That sounds very smart to me.
I just bought some CD’s for my wife and I, and I built a 5 yr CD ladder because we have cash above our emergency funds, but we are anticipating possible life changes in the next few years. Since we don’t know when we will need the money, it makes more sense to go with a guaranteed CD, vs. buying equities.
The rates we got weren’t 5.65%, but I felt the were competitive and they are with our main financial institution which is convenient. (We also didn’t drop 10k into a single CD).
I think you did a great job.
well, it’s down to 5.40%, but that’s still a bit better than 4.XX or passbook at 0.25%!
re:tom-
You’ve made some good moves, but also dealt with some higher risk than some people are comfortable with. Your returns could have easily gone the other way. I’m not attacking you, just the comparison of apples to kumquats…
A CD is a lower risk vehicle than options.
Some out there might actually argue that options aren’t investments at all, and are, like the rest of the stock market, merely speculation.
Tom,
I’m glad to hear your perspective. I agree that most people wouldn’t even consider relying on a savings account rate of return for anything. I’m not the world’s savviest investor, but am very risk-averse, so that’s where I feel most comfortable placing my emergency funds, but I do plan to diversify more into stocks and funds once I understand enough not to make giant mistakes. I’m treading carefully.
Jon,
Yes, I just checked and saw it’s at 5.40, so I’m glad I applied when I did. At least I know my nervousness was justified.
Patrick,
Thanks for your feedback – you definitely seem to understand where I’m coming from here.
Tom,
It all depends on how soon you might need the money. If you know you wouldn’t need these money for 10 years or so and wouldn’t care if there is a stock market crash in the meantime, then stock market is great.
But if you might need the money in the next couple of years, you really should keep it closer. Stocks don’t grow consistently. It may take years to get back what you lost. Lots of technology stocks, for example, are still well below their internet bubble heights.
Also, consider that layoffs and stock market crashes often happen at the same time. You don’t want to be forced to sell because you need the money when the market is at its bottom.
I have some money in stocks and some in CDs. Given that I am a little older, my allocation may be somewhat conservative, but even if you are young it may make sense to have at least a small percentage of your savings safe.
pretty decent rate. I don’t think the interest rates will jump back up in a year, but who am I to predict their crazy nature.
For those who might be nervous because this deal is Countrywide don’t be. The CDs are FDIC insured and you will not lose your money.
CDs are good for preservation of principal. If funds are for expenses that one will have over the next 5 years, CDs are a legitimate investment vehicle.
In addition, one has to determine their risk tolerance. One commentor noted buying Bershire shares. As I understand it, those shares are quite pricey and out of reach for most investors. If you are not risk tolerant and/or in the later stages of life, CDs again are legitimate.
I think Tom may have cruised on over something that I kept seeing “my emergency funds”. I persnoally am not risk averse but an emergency fund is not meant to be invested it should be in CDs or a High Yield MMA.