Do you like free money? I do.
Over the past 18 months or so, short-term interest rates have been rising. Theoretically, this means that banks should be passing along higher interest rates to depositors. However, while interest rates for mortgages and personal loans have gone up, many banks, particularly the largest national banks, haven’t increased interest rates for their depositors.
It’d be hard to blame yourself for not noticing. For much of the past decade, we’ve been in a near-zero short-term interest rate environment. It really didn’t matter where you banked because you’d be earning the same zero percent interest. Many banks are probably counting on you to not pay attention to interest rates, or maybe they just don’t think they need to do anything to keep your deposits. However, with rising interest rates driven by Federal Reserve rate hikes, it’s time to take stock of what your bank is paying you for your deposits. You just may find that you could easily pick up some free money by moving your money to a bank with more competitive rates.
For instance, as of this writing, Citibank is paying 0.04% interest on cash sitting in savings accounts under its Basic Account Package. Meanwhile, many reputable online banks offering the same FDIC-insured protections as their brick-and-mortar counterparts are offering 2.00% or more on savings accounts. Ally Bank currently offers an Online Savings Account with an interest rate of 2.20%. Depositing $10,000 at Ally instead of Citibank would net you an extra $195 after one year. Sure, that may not be life-changing, but it’s a real difference, and it’s not a bad return for 15 minutes of clicking some buttons on a computer screen.
Savers looking for even more yield while wanting to keep their cash in safe, short-term liquid investments should shop around for CDs and money market funds. Again, let’s compare Citibank and Ally Bank. Citibank is currently offering a 1-year CD at 0.25% APY. Ally currently offers a 1-year High Yield CD product with a 2.75% APY. Meanwhile, money market funds are offering competitive rates, with Vanguard’s Prime Money Market Account currently offering a 2.45% yield. If you shop around, you’ll likely find even better rates.
High-income tax bracket savers should also consider high quality municipal bonds or bond funds as a place to park their cash. A municipal bond is issued by a state, municipality or other local governmental entity and can be purchased through your securities broker (e.g. Schwab, Vanguard). What makes a muni potentially attractive to high income tax bracket savers is that the interest earned on most (but not all) municipal bonds is tax-free at the federal level and at the state level if the bond was issued in the state of your residence. There are some risks with purchasing munis. Unlike bank deposits, municipal bonds aren’t backed by FDIC insurance. There is always a risk that the issuing government can’t make its payment obligation. Also, depending on the duration of your municipal bonds, your investment would be subject to varying levels of interest rate risk.
Some of the default risk can be diversified by purchasing a high quality municipal bond fund. Vanguard’s intermediate-term California municipal bond fund currently has a 30 day SEC yield of 1.98% (think of this number as the anticipated return to be received by a non-California resident). A California resident with an income equal to that of the average-earning California lawyer of $168,200 and who invests in the above-mentioned bond fund can expect a tax equivalent yield (i.e. the effective yield due to not having to pay income taxes) of 3.21% (assuming Fed 32% and CA 9.3%).
Now, some are going to complain that comparing bank accounts and CDs to an intermediate-term municipal bond fund isn’t a fair apples-to-apples comparison. That’s true. However, the bigger point of this post is clear: your cash should not be sitting in an account earning near 0% interest. There are alternatives out there, both in the safest of savings vehicles and in some very safe, higher-yielding opportunities. You just might find some free money for the taking.
