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| Decision Center | Get your savings out of the bank
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You can do better than the pathetic interest rates most banks offer these days for cash and savings.
By Scott Burns
OK, America, it's time to wake up that sleepy money and move it!
I'm speaking, of course, about money sitting in bank savings accounts and other moldy places. There, like "The Man in the Iron Mask" or "The Count of Monte Cristo," it is ignored by its keepers.
In truth, if you examine your banker, he would probably make a good stand-in for the Grinch. Like a used-car dealer, he continues to believe that money is worth 20% or more (plus whatever fees he can tack on) if he's selling it to you, but your money is worth next to nothing when you deposit it.
I say this having searched the pathetic offers most banks are making for our cash and savings these days. Here's a side-by-side comparison based on national averages.- Interest checking. These accounts recently averaged a whopping 0.79%, according to bankrate.com. In Dallas, the biggest Grinch is Wells Fargo, offering a measly 0.20% on a money market account. Some may argue that it really isn't fair to expect much interest for cash that you could put to use at any minute.
Related news and commentary on MSN Money
I don't buy the argument, however, since mutual-fund money-market accounts let us use our cash at any minute, and they're now paying about 3.5%.
- Six-month certificates of deposit. The situation here is nearly as bad. Recently, the average rate on a six-month CD from a large bank, according to Banxquote.com was 2.73%. That's downright generous compared to the 0.20% on ready deposits at Wells Fargo, but it's still way less than the average money-market mutual fund. More important, it's wildly less than a six-month U.S. Treasury bill. These were recently yielding 4.27%.
- One-year certificates of deposit. Same problem. The average large bank one-year CD is yielding 3.29%, while recently issued one-year Treasury bills are yielding 4.37%. You can earn more in a no-time-commitment money market mutual fund than you can earn on a one-year bank CD. That ain't right.
- Five-year certificates of deposit. At five years, the gap is narrowing, but the banks are still stingy. The average large bank CD is yielding 3.89%, while a five-year Treasury, according to Bloomberg.com is yielding 4.43%.
Indeed, the Deposit Opportunity Gap has seldom been greater. If you visit my Web site, www.scottburns.com (free sign-up required) and click on "The DOG Report," you'll see how a $50,000 portfolio of average bank CDs compares to a $50,000 portfolio of U.S. Treasury obligations. The portfolio, which contains maturities of three months, six months, one year, two years and five years, is currently showing a deposit opportunity gap (hence, the DOG Report) of $570.
That's how much more you'd earn in Treasury obligations than in comparable maturity average bank CDs. We update this report every week. There have been periods when the DOG has been larger -- like much of the year 2000 -- but our bankers are definitely showing disdain for our cash.
The banks aren't doing this out of malice. As the Fed has raised interest rates this year, the "spread" bankers make their living on has narrowed. Everything they can do to lean against the rising cost of deposits helps their bottom line.
Unfortunately, their leaning against the rising cost of deposits hurts our bottom line.
So if you are a serious interest investor, it's time to scour your accounts. Search for undervalued, unloved money. Once you find it, move it. Find a home that will treat it better.
What, specifically, does that mean? Here are two recommendations:- If you know money won't be needed for two to five years, invest it accordingly in longer-term Treasury securities. You'll increase your yield substantially. If you have a good deal of money, this would be a good time to establish a Treasury ladder, owning securities that mature in one, two, three, four and five years. You'll collect over 4% and have minimal interest rate risk.
- If you know money won't be needed for at least five years, consider putting it in I Savings Bonds. These will earn at a 6.73% annual rate until May. Those purchased between now and then will earn at 1% plus the trailing rate of inflation. The interest will accumulate tax-deferred, you'll have inflation protection and inflation needs to average only 2.89% a year to beat the 3.89% yield on the average bank CD. Inflation would have to average 3.43% for an I Savings Bond to beat the 4.43% yield of a five-year Treasury.
If you think, as I do, that inflation will be higher than 3.43%, then I Savings Bonds are a good deal.
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