Where to keep cash?

[FinanceDude]

Simple Answer: Anywhere BUT your local bank.........

 

[JOHNNIE36]

Got a flyer in the mail today for a 12 month CD @2.65%. What? This company is named First Financial Group and is subtitled "The Original CD Locator and Financial Service Co". States all accounts are FDIC insured. I think the disclaimer of interest is "Yield and deposit amount subject to availability". It was too late to call today but I certainly will tomorrow, but probably closed on Saturday.

 

[Koolau]

Got a flyer in the mail today for a 12 month CD @2.65%. What? This company is named First Financial Group and is subtitled "The Original CD Locator and Financial Service Co". States all accounts are FDIC insured. I think the disclaimer of interest is "Yield and deposit amount subject to availability". It was too late to call today but I certainly will tomorrow, but probably closed on Saturday.

Sad to think we (at least JOHNNIE36 and I) would salivate over 2.65% interest! Definitely something wrong with today's economy (or at least the way our gummint is handling it). I long for the good old days when CDs would at least keep up with inflation (real inflation - not what the gummint says it is).

Not sure of an answer. Maybe buy "goods" today in anticipation of tomorrow's inflation. Hmmmm... How much room would it take to store $75K worth of TP, motor oil, soap bars and other consumables? Probably not such a good idea after all. On a more serious note, I'm considering non-emergency home improvements using under-employed hired help. Good for them - good for me. As always, YMMV.

 

[Lsbcal]

Sad to think we (at least JOHNNIE36 and I) would salivate over 2.65% interest! Definitely something wrong with today's economy (or at least the way our gummint is handling it). I long for the good old days when CDs would at least keep up with inflation (real inflation - not what the gummint says it is).
...

It helps to look at the overall portfolio. I'd rather have negative after inflation returns on minor cash positions while getting good returns on equities then the other way around.

 

[AndrewJackson]

I am doing a 5 year cd with Allied (2 month penalty) at 1.75% I think.

 

[JOHNNIE36]

I am doing a 5 year cd with Allied (2 month penalty) at 1.75% I think.

Yeah, that's probably what I will do also. I'm not too worried about reinvesting the $75 CD (currently earning 4.5%) coming due in two weeks. It's next year when my IRA CD is maturing, currently earning 4.65%. What to do then with a large amount of money?

 

[smjsl]

That's way better than my other cash holdings where I pay ordinary taxes on interest income every year.

Well, what is "way better"? Say you have 1% in savings vs ~2% in Ibonds. Say you are in 50% tax bracket to make it really large... So you end up with 0.5% real in savings vs 2% in Ibonds that will later be taxed as well. If you compare savings vs Ibonds that means when things "return to normal", you'd move Ibond stash into CDs or somewhere else that has better returns and pay 50% then... So really, I bonds would pay about 1% after that, which is still 0.5% real more...

Now, 0.5% from 10k yearly limit for 1 is about $50... per year... Ok, maybe $100 for 2, and maybe if you do the trick with overpaying taxes $150 for two some of which will be paper bonds I think (minus small amount of lost interest for overpaying taxes)...

And yes, I did not account for tax-deferral piece; at these rates, it would not be large: at large 50% tax rate, 2% inflation, 5 years, it would amount to ~0.1%, so ~$10, or $2/year for 10k.

Now, I personally rather hold my cash in a 1.85% 3-year PenFed CD than a 1% cash account (unless I need them within a year or so), and in any case, any money in I-bonds should not even be compared to cash account since you have to hold them for at least 1 year and pay a 3-month penalty in first 5. So, I think I-bonds should be compared at least to 5-year CD rates if comparing I bonds with other cash sources...

 

[audreyh1]

No, I don't think you can claim an IBond is equivalent to a 5 year CD. IMO it's closer to a 1.25 yr CD with a 3 month early withdrawal penalty. Many CDs > 1 year have a 6 months early withdrawal penalty, and many 5 year CDs have a 12 month early withdrawal penalty.

And more importantly, the IBond resets every 6 months to the current inflation rate. So it's a pretty good bond to hold when inflation starts to rise until 1-2 year CD rates catch up with inflation.

 

[obgyn65]

For what it's worth, I just bought a 10-year CD at 2.8%.

I am doing a 5 year cd with Allied (2 month penalty) at 1.75% I think.

 

[HFWR]

I'm not sure CDs have ever consistently beat inflation...

 

[audreyh1]

I'm not sure CDs have ever consistently beat inflation...

I don't think they have either - at least not after taxes.

However, during periods where the Fed is raising interest rates to fight inflation and to slow the US economy down, CD rates can become quite attractive. It is during these times that buying some longer-dated CDs can make sense. I think it is these times (recently 1999 and 2000; 2004-2006) that people remember getting a sweet deal on CDs. Folks just need to remember that these are the exception rather than the rule. And we are in the opposite situation right now.

Inflation for 2012 was 1.7% which is pretty low by historical standards. Even compared to the past decade that had some deflationary episodes I think it has averaged 2.3-2.5% (since 2000).

Edited to add:

Well, there have been periods where CD rates paid well above inflation. 2% above inflation is pretty good - even after paying taxes. I found this chart for 3 month CDs:

From Free By 50: Historical CD Savings Rates vs Inflation

 

[photoguy]

I think it is these times (recently 1999 and 2000; 2004-2006) that people remember getting a sweet deal on CDs.

Wasn't this around the time (~1999) when you could get 3% real Ibonds? That was before I started working (=no money to invest) but it seems like a killer deal.

 

[audreyh1]

Wasn't this around the time (~1999) when you could get 3% real Ibonds? That was before I started working (=no money to invest) but it seems like a killer deal.

Yeah like 3.6% + inflation in 2000. Part of the deal was they were new, so people had to be encouraged to buy them. I think you could get real 3% TIPs too.

I think you could get 6.5% 10-year treasuries at the time, so that's why people might have missed them.

 

[imoldernu]

Re: IBonds
With a Jumbo CD maturing in 2000, the renewal rates were still ok, but we went to IBonds, because we didn't know any better. Did the same for the next several years. At the time, each person was allowed to take out $30,000/yr. Based on the formula, (see Treasury site for specifics), we have always made at least 6% on the early bonds, and as much as 8.3% in 2008, when the CPI was a little higher.
ww.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm#comb
Currently, with the CPI being near zero, we're at the bottom of the rates... 6.3% and 4.5%.
The "fixed rate" between 2000 and 2004 was from 1.6% to 3.6% In the past 4 or five years, that rate has been 0%. Ya have to look at the formula to understand the rates:

Composite rate = [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)

The formula provided 1.76% interest in the last 6 month period. This is probably the minimum.

Unless we go to chained CPI in the future, any increase in inflation should be covered. If the Fed allows interest rates to rise, I bonds could be a possibility again.

BTW... the current maximum for IBond Purchases for one person is $15,000. Max $10,000 electronic bonds, and $5000 when buying with IRS refund.

 

[panhead]

Well, this thread is a little old, but I'll try to bump it.
I have known about treasurydirect and ibonds for quite a while, but apparently like many here, haven't really investigated them. I just read more, and this looks like a great place to keep cash (as long as you don't need it for at least a year, as apparently you can't cash the bond till then).
So, if I understand everything correctly:

1) You can never lose principal
2) looks like you make about 1.76% interest for 2013
3) You can defer paying fed tax on interest until you cash em, like when you are in a lower tax bracket
4) They are state tax free
5) they have a 3 month interest penalty if cashed in before 5 years
6) Inflation protection (duh)
7) you can buy $10k/year electronically
8) You can buy $5k/year from a tax return

The only thing I don't completely understand is the buying of these bonds thru your tax return. If I don't get $5k back I assume I can't buy this $5k worth of bonds? (yes, that seems like an obviousl question) So, does that mean I would HAVE to overpay by $5k to be able to do this? (again, seems like an obvious question, but who knows?)

I am seriously thinking about putting together a ladder of these for my cash dollars....

 

[audreyh1]

Well, this thread is a little old, but I'll try to bump it.
I have known about treasurydirect and ibonds for quite a while, but apparently like many here, haven't really investigated them. I just read more, and this looks like a great place to keep cash (as long as you don't need it for at least a year, as apparently you can't cash the bond till then).
So, if I understand everything correctly:

1) You can never lose principal
2) looks like you make about 1.76% interest for 2013
3) You can defer paying fed tax on interest until you cash em, like when you are in a lower tax bracket
4) They are state tax free
5) they have a 3 month interest penalty if cashed in before 5 years
6) Inflation protection (duh)
7) you can buy $10k/year electronically
8) You can buy $5k/year from a tax return

The only thing I don't completely understand is the buying of these bonds thru your tax return. If I don't get $5k back I assume I can't buy this $5k worth of bonds? (yes, that seems like an obviousl question) So, does that mean I would HAVE to overpay by $5k to be able to do this? (again, seems like an obvious question, but who knows?)

I am seriously thinking about putting together a ladder of these for my cash dollars....

Several of us have been maxing out our yearly ibond investment since right now it is an excellent place to keep cash if you don't need it for at least a year.

The 1.76% is an annualized rate but only paid out for 6 months of the year. In May (well sometime in April, actually) we'll know what the rate for the 6 months starting in May 2013 is. If you buy IBonds today, you'll get 6 months at the current rate, then it will switch to the new rate in September. The rate is based on the change in inflation (CPI-U) for each 6 month period.

Some folks here have done the tax refund thing in IBonds, but yes, you would need to overpay enough to have a considerable refund to take advantage. We don't bother with that route, but if someone had overpaid that much anyway, I can't see why they might take advantage of it.

 

[Tyro]

Some folks here have done the tax refund thing in IBonds, but yes, you would need to overpay enough to have a considerable refund to take advantage. We don't bother with that route, but if someone had overpaid that much anyway, I can't see why they might take advantage of it.

You can't just send the add'l $5K (or difference or whatever) with your tax return?

 

[bondi688]

Cash for me had returned nothing in the last 4 years. As a matter of fact, cash lose me money after inflation and tax. I kept more than I should as cash as emergency fund and a pot for investing. But lately the cash had been sitting there because of a lack of good investment opportunity as the market repeatedly notched new highs.

I am thinking of something slightly more radical (for me). I am contemplating just taking the cash and buy a retirement home. Nothing fancy, just a clean and well kept house. I need a place to live anyway and I have been renting. A large part of the price of the house will be offset by the money I will spend on rents (actual number is about 8 to 9 years of rent payment for a 2 BR apartment, if the landlord did not raise rent.) Would that be a better use for that cash?

Inputs are most welcomed.

 

[rbmrtn]

The only thing I don't completely understand is the buying of these bonds thru your tax return. If I don't get $5k back I assume I can't buy this $5k worth of bonds? (yes, that seems like an obviousl question) So, does that mean I would HAVE to overpay by $5k to be able to do this? (again, seems like an obvious question, but who knows?)

I am seriously thinking about putting together a ladder of these for my cash dollars....

The way to do this is file an extension with a payment. Overpay enough to get a 5K refund, then file with the form to purchase ibonds

Backdoor to Paper Savings Bonds

As others mentioned the rate is only for the current period, the interest part is set for life, the inflation part gets reset each 6 months.

 

[panhead]

Thank you very much audreyh1 & rbmrtn! I've known about these for a long time but have never looked into what kind of return they have. With the cash situation as it now is, I'm going to start buying them this year.

Just one more reason why I love this board!

 

[audreyh1]

You can't just send the add'l $5K (or difference or whatever) with your tax return?

I don't know. I was under the impression it would be taken out of your refund, and as far as I know the 1040 doesn't have a way for you to add money for a refund.

But I bet someone here has tried it?

 

[Alex in Virginia]

I do this frequently but learned the hard way with Band of America because they charge a fee to transfer funds. So, the way out of this is to request the transfer through ALLY. So when I want to transfer funds from BOA to ALLY, I ask ALLY to request the funds from BOA. No fee. Also, I have noticed that funds requested by ALLY from BOA only take two days as opposed to three days. Maybe not guaranteed, but common.

No matter which banks, the whole trick is to initiate the transaction from the bank that is going to be RECEIVING the funds. You NEVER get hit with a fee when you are putting money into an account.

FYI, I've got my "standby" cash at Ally, SallieMae and Barclays. They all pay 0.85% or better.

Cheers...

Alex in Virginia

 

[aida2003]

Got a flyer in the mail today for a 12 month CD @2.65%. What? This company is named First Financial Group and is subtitled "The Original CD Locator and Financial Service Co". States all accounts are FDIC insured. I think the disclaimer of interest is "Yield and deposit amount subject to availability". It was too late to call today but I certainly will tomorrow, but probably closed on Saturday.

I see a similar ad each week in our local newspaper. It's very tempting because they offer 3.25%. However, I vaguely recall hearing that first you're invited to meet and they try to convince you to buy or invest in some of their insurance products. My suspicious mind says that if you don't 'invest' with them they can decline this 'sweet' CD...This set-up resonates with time-share sales pitches, but at least you get your 'free' dinner or show afterwards.

 

[aida2003]

I am doing a 5 year cd with Allied (2 month penalty) at 1.75% I think.

I think last year Ally changed the fine print of their CD's. Not sure where I read the discussion about it. It was either on the Bogleheads or some banking blog. Anyway, the fine print *before* the change said 2-mo. penalty only, but *after* the change has an addition 'withdrawals at our discretion'. I have NOT read the print personally on my new Ally CD, but what people were saying was that when the interest rates start rising and customers start calling Ally to withdraw their CD's, Ally will be able to decline your request 'to break' the CD until the term is up.

 

[rbmrtn]

I think last year Ally changed the fine print of their CD's. Not sure where I read the discussion about it. It was either on the Bogleheads or some banking blog. Anyway, the fine print *before* the change said 2-mo. penalty only, but *after* the change has an addition 'withdrawals at our discretion'. I have NOT read the print personally on my new Ally CD, but what people were saying was that when the interest rates start rising and customers start calling Ally to withdraw their CD's, Ally will be able to decline your request 'to break' the CD until the term is up.

Haven't seen that. It should be discolsed on their site. It still has a 60 day penalty.

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