Best Liquid Options for Your Money That You Want to Keep Safe
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.
Bottom Line
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?
Another way of looking at it is to add up the number of quarters in the table below that FSTFX had a loss (a total of ten - relatively small number compared to many others).
Thus FSTFX is a good choice but a little bit timing of the market is a must: for example, you don't want to purchase it on a day like today that most stocks are trading low and most bonds are trading high...
The downside is that a portion of the money is locked up for 3-5 years, but she will receive a steady income stream monthly (return of capital and interest)
You can even see that equities have already jumped back to pre-crisis levels.
But, I'm willing to bet all my money that rates will go higher at some point. (although, probably not in the near future) Debt is high but the ratio of debt to gdp isn't uncontrollable yet.
Or you can hold commodities as they are traditionally used hedges against inflation.
Interest rates will never go high again but I don't agree they will it to the point that #6 envisions in his nightmare. If his scenario comes true, our economy and life as we know it is gone so why worry about anything! Also, if you ever had rental property, you would know what Hell really can be like! Now "that" is worse than low interest rates to me! People who trash your property and then run out on you in the middle of the night without paying for rent or damage. It's good for taking a "lost" on your taxes but as for making money?? You better get expert and professional advice before you take that on, imo. It's not as simple as some make it sound. I'd rather sell bananas on a street corner first!
Cheer up folks! As they say "What goes down has to go up". If you believe that you must be relatives of #6!
--Helena Torrick
http://signon.org/sign/the-feds-zero-percent
Thanks for ANY help!
I also agree with Jennifer (#27): in any (and especially in this) economy you pick your anxiety. Success in real estate is not guaranteed. Her aunt and uncle might have used part of their funds for rental properties, and had tenants stop paying their rent. Eviction is a slow process and is not free. If the property was still mortgaged, then they would have to pay that monthly bill out of their own pocket. If the property was owned free and clear, then there would be no income while the eviction was proceeding (and likely for some time before). That could easily wipe out any advantage over a 1-2% account.
The thing is, though, that many of us have to be more "imaginative" with our savings if all we can get is 1-2%. To give up the use of $100,000 on a long-term basis for $1000 or $2000 is just plain unacceptable. If there exists a reasonable option to buy a rental property and receive $3000 to $5000 net, I think that should be explored. I am 78 y.o., have one three-family home and yield about 4.5% on it. No mortgage, it's only worth about $145,000 so I own it free and clear. If you are careful, get good security, etc., check references, have a good local attorney to draw up a lease, etc. and pick your location/property carefully, it's a high likelihood of turning out fine. There are horror stories, but there are many more success stories that you never hear of. There are plenty of good tenants out there also who appreciate a fair rent and a well-cared for place to live and stay for a long time.
My first tenant was an angel: took excellent care of the property, paid promptly without problems and gave me plenty of notice that she was applying for a transfer with her company. Unfortunately despite excellent references, the second tenant was a nightmare for a number of reasons. I did not fall into the trap of renting to the next person, but continued my process of careful vetting. The third tenant turned out to be a nightmare also, and in the end I paid two mortgages (my own and the rental property) for several months while also repairing damages not covered by the security deposits.
You are also right that one only the horror stories get press. While I am grateful for the lessons learned, having lived through two makes me reluctant to try it again (once burned, twice shy).
Understood. We are all a sum of our experiences. That is why I stay away from the stock market. Good luck to you and bless you and your family at this holiday time. Hopefully economics will improve for us all going forward.
I'd go half into Ally's 5-year CD and half into Ally's 11-months no-penlty CD for it's guarantied %0.93
First half will earn higher interest, but has an off chance of problems if your friend would want to cash out early. The second half would earn measely %0.07 less than leading saving acc, but the APY is guarantied for 11 months.
In for $550,000. 3%-5yr, 11m- recent rate.
The best "backyard" i could find to bury it in.
Got top bunkbed so no mattress safe.
Waiting for that eventual rainy day. :)