One of my friends recently inherited quite a bit of money. She currently has it in a Wells Fargo savings account which is earning very little interest. She asked me if I had any suggestions where she can earn more money. For others who might be in a similar situation, I thought it would be useful for me to share some of my thoughts on her situation.
My friend has always stuck with brick-and-mortar banks. Also, she's not a fan of online banking. She might be willing to give internet banks a try. Also, she likes to keep her finances simple.
She does have a Fidelity brokerage account. Most of the money she has at Fidelity is in an IRA which holds stocks and mutual funds.
Her future plans for the money she inherited is to invest it in real estate. However, she doesn't have any immediate plans for the money. She just wants to keep it safe and accessible so when an investment opportunity arises, she can jump on it.
First, I broke the bad news to her that in today's awful interest rate environment, there's no way to earn "high" yields and keep it 100% safe. I'm not sure how much money she has, but it's over $100K. So it will still be worthwhile to move the money from Wells Fargo. Even if she can earn just 0.50%, that's an extra $500 per year assuming a $100K balance.
Reward Checking Accounts?
Since she has over $100K and she wants to keep things simple, I don't think a reward checking account would be a good choice. If she doesn't mind the work, it may be worth it. I have more details about reward checking accounts in my post 10 Common Traits of High-Yield Reward Checking Accounts.
Internet Savings Accounts?
An internet savings account would be a better choice if she can learn to like online banking. That had me thinking about which internet bank would be best. Should I suggest the top internet banks that currently offer at least 1.00% APY? As I mentioned, she likes to keep things simple so she won't want to jump to a new internet bank every six months.
I currently have 7 savings and money market accounts in my latest weekly summary which offer at least 1.00% APY. What concerns me about them is the question of whether they will remain competitive for the long-term. Three out of these seven are only intro offers with rates that will definitely fall within months. These are Flagstar Bank, EverBank and Salem Five Direct. Two of the seven are new internet banks, TIAA Direct and Barclays, so it's questionable if they'll remain competitive in the long-term. That leaves MyBankingDirect and Incredible Bank. MyBankingDirect has been around since 2005, but it doesn't have a long history of top rates. Only in the last year has its rate been near the top. Incredible Bank was launched in 2009, and its checking and money market accounts have remained very competitive. So out of these seven internet banks, I would give the edge to Incredible Bank.
There are a few internet banks with rates that are not quite in the top bracket, but they have a long history of competitive rates. Also, they have a long history of good customer service and solid internet banking features.
One isn't an internet bank, but it's a lot like an internet bank with a solid online banking interface. It's Alliant Credit Union. This month its savings account fell out of the 1.00% club when its yield fell from 1.00% to 0.95%. Its rates have a long history of being competitive, and many readers have been very happy with the credit union.
One internet bank that can be included in this list is ING Direct. Its online savings account has a long history of being fairly competitive. It has rarely been in the rate leader group, but it has never been uncompetitive compared to other internet banks. Also, for those who have at least $100K, you can receive a higher rate with its Electric Orange checking account which offers higher yields for balances of $50K and $100K.
Another good option is Ally Bank. Like ING Direct, its savings account has a long history of being fairly competitive. Also like ING Direct, it has good customer service and many solid internet banking features.
Certificates of Deposit?
One advantage with Ally Bank over ING Direct is that its CD rates are more competitive. In addition, my friend may find Ally Bank's 5-year CDs interesting. As I mentioned, she doesn't want to be locked into a CD. However, Ally Bank CD's have an early withdrawal penalty of only 60 days of interest which reduces the risk of being locked into a CD. If she needs the money just 4 months after she opens the CD, she would lose just half of the accrued interest. In that case, she comes out better than if she had just kept the money in Ally's savings account. I've reviewed the risks many times of planning for an early withdrawal from long-term CDs (see blog post). One way to reduce the risk is to split the money between the savings account and CD. Also, it can be helpful to open multiple small CDs rather than one big CD. The reason is that Ally doesn't allow for partial early withdrawals.
Short-Term Bond Funds?
Finally, there is one option that may interest my friend who wants to keep things simple. Since she already has a Fidelity brokerage account, she may want to consider short-term bond funds that she can get without transaction fees at Fidelity. Unlike bank accounts, these have no FDIC protection. Bond funds have interest rate risks. Some principal can be lost if interest rates go up. Short-term bond funds help reduce this risk. Also, there's the risk that some of the bonds in the fund could default. If she is willing to accept these risks, she might consider a fund like Fidelity Short-Intermediate Municipal Income Fund (FSTFX). Its current 30-day yield is 0.80%, and its tax equivalent yield is 1.23%. You can see its performance history at Yahoo's Performance page of FSTFX. Since 1987, the only year it had a negative total annual return was in 1994 when it lost 0.08%. As with any mutual fund, its history is no guarantee of future performance.
As I first mentioned to my friend, there isn't any safe investment with high yields in today's awful interest rate environment. Nevertheless, she can definitely do a lot better than keeping her money at a megabank savings account. What suggestions would you have for my friend?