How to get the best rates on your savings — safely

Over the past year, one of the frequent questions I get is: “Where I can safely invest my money to get a decent return?” For example, Joseph wrote in November:

Around February/March, I should have $5,000 to invest. My debts are under control and my wife and I have lowered our monthly expenses. I was wondering if you had any advice on ways to invest $5,000. I don't want a savings account because the interest rates are just sad, but I don't know if a certificate of deposit or money market account is worth the effort.

Or take this e-mail I got from MG just last week:

How about addressing how to invest $5,000, $10,000, or $15,000 these days? With high-yield savings rates getting lower and lower and the stock market not doing so well either, what would you recommend?

Note: Before I launch into the main point of this article, let me counter that last claim in MG's e-mail: The stock market hasn't been doing so well lately. What? In the U.S., the S&P 500 index is up over 30 percent in the past year. It's up nearly 60 percent since bottoming out on 06 March 2009. If that's “not doing so well,” I'm not sure what more MG wants! For long-term investing (as in decades), I am still convinced the stock market makes the most sense.

Because the stock market has been so volatile over the past 15 years, a lot of people are scared to invest. Or they just want to find safe places to put part of their money in the short term. Unfortunately, it's not like new ways to invest safely are being invented. If you want your money to be safe, you've basically got the same tried-and-true investments you are already familiar with.

Two recent articles in national magazines addressed this subject. Let's look at their advice.

Advice from “Consumer Reports”

The March 2010 issue of “Consumer Reports” has a great article on finding the best rates on your savings. They start at the same place we all start: bank accounts. Here is what “Consumer Reports” recommends:

  • Compare bank yields. They recommend checking out rates at Colorado Federal Savings Bank, Capital One Direct, and Axos Bank, as well as old stand-bys like Ally Bank and FNBO Direct. But remember: Sometimes the best place to earn money on your savings is in a checking account. You can use CheckingFinder to track down deals on rewards checking accounts around the country.
  • Be cautious about bonds. Bonds continue to be one of my blind spots, though I'm learning more about them as time goes on. The “Consumer Reports” article cautions against bonds right now because their long-term outlook isn't very good. If you are interested in bonds, consider Treasury Inflation-Protected Securities (TIPS) which give a modest return but offer built-in protection against inflation. (I've got a small post for later today that looks at I Bonds, which also protect against inflation.)
  • Look at stock dividends. Some stocks pay regular dividends to shareholders, dishing out five or six percent a year. That's probably way more than your bank pays on savings, but it also exposes you to added risk. You can reduce this risk by diversifying: Buy a mutual fund with high dividends instead of individual stocks. Examples include XLU (a utilities sector exchange-traded fund with a 4.31% yield), TWEIX (American Century Equity Income fund, yielding 2.77%), VEIPX (Vanguard Equity Income fund, yielding 3.14%), and VWNFX (Vanguard Windsor II fund, yielding 2.33%).

To be honest, I am not sure that chasing stock dividends is the best way to get safe savings. Yes, I believe the market will increase over the long term; but folks who want safe harbors are usually looking to avoid risk — and, over the short term, stock funds are risky, even if they do have nice dividends.

The article suggests another option, one that I happen to like a lot. Because yields are so low right now, it can make sense to use your money to pay down your mortgage instead. You shouldn't do this if you don't have emergency savings yet; but if you are near retirement or still paying private mortgage insurance, this can be an especially great use of your savings dollars.

Advice from “Kiplinger's”

The March 2010 issue of “Kiplinger's Personal Finance” has a small section on finding better rates. Their advice? “Start by looking online. Ally Bank is paying 1.45% on savings — way north of the 0.23% average rate on money-market funds.”

“Kiplinger's” recommends taking on a little more risk in order to get better rates. In particular, the magazine suggests:

  • Vanguard Short-Term Investment-Grade Bond Fund (VFSTX), which has a 3.78% yield as of the end of January. (This fund has a $3,000 minimum investment.)
  • Fidelity Intermediate Municipal Income Fund (FLTMX), which has a 3.50% yield but offers tax advantages. (But there is a $10,000 minimum investment.)
  • Fidelity GNMA Fund (FGMNX, which owns home mortgages, currently has a 3.68% yield. (This fund has a $2,500 minimum investment; $500 for IRAs.)

For safe savings, bond funds may make more sense than stock funds, but I still think they are riskier than most people in this situation are after. I guess it depends on your goals.

The bottom line

As you prepare to save, you need to ask yourself a few questions:

  • What are your goals with this money? If you are saving for retirement, stashing money in a savings account probably isn't the best way to go about it. You are not going to get the returns you need. In fact, you'll barely keep up with inflation.
  • How much risk can you tolerate? Risk and return are intertwined. If you want high rates of return, you are not going to get them with safe investments. To do that, you have to be willing to tolerate ups and downs. If you are okay giving up potential gains in order to protect your money, then there are a variety of options.
  • How liquid do you need the money to be? That is, do you want easy access to the money? Some investments — like certificates of deposit and savings bonds — can offer higher rates of return — if you promise not to touch the money for months or years.

Where do you put money that you want to keep safe? Do you even worry about returns? How can GRS readers find a good balance between safety and earnings?

Note: A couple of weeks ago, “The New York Times” Bucks Blog ran a piece on the least-trusted banks in America. For those who get on my case for pimping ING Direct instead of HSBC Direct, check this out. HSBC is the least-trusted bank in the U.S.; ING Direct is the most-trusted bank in the country after credit unions (which were way ahead of the pack — way ahead) and USAA.

This website may receive payment by the companies mentioned in this blog.

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basicmoneytips
basicmoneytips

I have had an ING savings account for a long time and I have really been pleased with it. I also opened a Sharebuilder account because I could link them. Their service seems good and it is relatively easy to link additional accounts at other banks.

I really do not have other savings accounts, other than ING, but so far there has been no reason.

Mrs. Money
Mrs. Money

I’ve got ING too. That’s the only place I keep my savings because of the “high” interest rate. I’ve been very pleased with them too!

I can’t wait for interest rates to go back up! 🙁

Sakoro
Sakoro

“This website may receive payment by the companies mentioned in this blog” Really, J.D.??? Say it ain’t so! I can deal with advertising, but paid endorsements? Please offer your readers an explanation.

karla
karla

We just got to join USAA!!!!!! (alert…they’ve opened it up to anyone who was honorably discharged from the military without time restrictions)

Slowly but surely we are moving most everything over there. Auto insurance is next.

And I couldn’t be happier.

Well, I’ll be happier if I figure out how to do wire transfers between USAA and a foreign bank.

Allison
Allison

I’m surprised no mention of CDs in the article. My husband and I have three CDs right now with different maturity dates (6 months, 9 months and 2 years) all at just over 2% interest. We plan on using these savings in the next few years, so we just wanted a safe return. All our retirement savings are in target date retirement index funds. We have USAA banking and are very happy with them. I am really looking forward to your piece on I Bonds. I’m planning on opening 529 plans when we have kids and I’m leaning toward safety… Read more »

Mike Piper
Mike Piper

Sakoro: That’s pretty much a standard for personal finance blogs (including my own).

For example, when they link to Ally Bank, ING, or Lending Club, they’re almost always doing it with affiliate links, meaning they receive a commission if you open an account through the link.

It’s actually noteworthy that JD includes many links to banks that have no affiliate program–many PF bloggers limit their mentions exclusively to companies with such programs.

Chetan
Chetan

I’ve been with ING for more than 4 years and am quite happy. There are other banks out there that offer a little bit more occasionally, but they’re not worth the effort.

That said, I will grab a good deal if I can get it.

Adam
Adam

I use USAA and ING Direct for all my banking. I have been on the lookout for someplace to get a better return. The !.2% at ING isn’t great, and their short term CDs aren’t any better. I’ve thought some about peer to peer lending, but I haven’t decided how I feel about it.

Jon
Jon

I am amazed how little know about Zopa. This is a great way to earn interest at significant levels by lending to other people. Zopa take a 1% slice of the action (to pay for credit scoring, debt recovery and their very clever web site). I have been using it for over a year with no bad debts and an income of over 7%. I have written more about my experience with ZOPA here:-

http://www.mysipp.net/create-income-become-a-bank/

Basically, by using a $10 maximum loan share your risk is reduced greatly.

DJ Wetzel
DJ Wetzel

I have been saving with ING for over three years now and even though the interest rates have been steadily decreasing, I have stayed because of their excellent user interface, great customer service, ease of transfers, and use of sub accounts. I will continue to recommend them to my friends.

Jackie
Jackie

I think people are often confused by the difference between savings and investments, probably because people usually call it “saving for retirement” when what they are often doing is investing money for retirement.

At any rate I like the tip about looking at high yield checking accounts as a possible source of higher interest rates 🙂

Tyler
Tyler

I’m in a similar situation – I want to put away my tax refund to start a “house downpayment” fund, but with ING Savings at a low 1.2%, CDs at low percentage for the required lock away time, it almost looks like an index fund is the best route to go.

Meaning, I have to hope the gains from the stocks over the next 5 years (when I estimate getting a home) minus capital gains taxes are greater than the CD interest rate.

kv
kv

I have been a long time fan of ING, but their recent anemic returns have me looking elsewhere.

In this instance, I agree with Kiplinger’s advice to look into Municipal bonds. Although there is some risk associated with any bonds, Muni’s have the advantage that the interest they earn is tax free. I’m getting 3.74% right now, but that’s equivalent of a taxed account at 5.75%.

They may not work for the OP, as they often have high minimum investments.

Jeremy
Jeremy

Our main “investment” right now is actually our emergency fund, so we don’t want to tie that up in CDs. We got in on one of the last high-rate checking reward accounts at 4.5%, and it’s locked there until May — definitely worth the hassle of setting it all up. After that rate expires, it’s probably going back to HSBC Direct (or Advance, or whatever they are now)

DonB
DonB

First I note there is not enough information to make a suggestion. Is this money for a down payment on a house? Does the person mean to start their retirement savings? These are very different goals, and the approach is probably not going to be the same. I’ll throw out dollarsavingsdirect.com as another good online savings account. Better interest than ING for pretty much as long as I’ve held the account. Another possibility, if your politics swing that way, is NRAbankingcenter.com. They don’t have as good an online banking interface, but they are the only online savings account that gave… Read more »

JL
JL

I think in the spirit of transparency, you should disclose the specific banks you recieve money via endorcements/affliation. I always hate when people use a blanket disclaimer. As you are a blogger with a great deal of creditability and clout, it throws your recommendations in doubt when you say that you may have been paid to make them (and don’t disclose what they are). Pundits on tv give full disclosure when they talk about a stock or company they own/work for, and while the disclaimer is a start I feel like it is lacking in transparency. Just my 2 cents,… Read more »

J.D.
J.D.

@Sakoro (#3) I appreciate your concern, but I wouldn’t classify any of the affiliate links in this article (or any other article I write) as “paid endorsements”. (I’m not endorsing Ally Bank or FNBO Direct, for example; I don’t know enough about them to do so. ING Direct? Well, I endorse them, but that’s because I use them and like them.) You may classify them this way, but I don’t. To me, a paid endorsement is when somebody says, “Pssst. We’ll pay you $xx of you write about us.” and I say yes. That’s not how I choose what I… Read more »

KC
KC

Our emergency fund (about 6 mos worth) is in a credit union money market drawing about 2%. The rest is invested. About half of our overall investments are in retirement vehicles spread among lousy mutual funds in the 401k to individual stocks for the Roth. The rest of our non-retirement money is in stocks through a discount broker and one decent sized chunk in an S&P index fund. Most of the individual stocks are dividend bearing and bought when companies were at nice, low prices – MCD paying 4%, GE paying 6%, GSK paying 5%, VZ paying 6.6%, XOM paying… Read more »

J.D.
J.D.

@JL (#16)
In this article, the links for Ally Bank, FNBO Direct, and ING Direct are affiliate links. If there were an elegant way to flag just the affiliate links, I’d use it. (And there may be — I just haven’t figured it out yet.)

Jeffry Pilcher | The Financial Brand
Jeffry Pilcher | The Financial Brand

J.D., you could double-underline affiliate links. Easy CSS, and pretty common practice.

Crystal
Crystal

We use ING Direct for our checking and savings accounts and have been very happy customers since 2005. We also have a Scottrade account we use to invest in high-yield dividend stocks (Pepsi just increased their dividend). Our Roth IRA has been making great returns with a Fidelity target date fund and my 401k has been doing well in a Vanguard target date fund (not quite as well as Fidelity, but that isn’t an option with my 401k). We are now considering transferring our emergency fund over to Smarty Pig since they have an APY of 2.01% right now…has anyone… Read more »

frugalscholar
frugalscholar

Sadly, these days a high yield savings account is in name only. When I bought a house (1990), mortgages were an eye-popping 10%, but my Vanguard money market was paying 9%. Now, mortgages are about 5%, but you only get 1% or so on your savings. I’ve never seen a spread like that. That spread, by the way, indicates why banks did so well last year: they could invest in Treasuries at 3%, while paying out almost nothing to their savers. And as for the stock markets super returns–those too are eye-popping, but only since the low of MArch 2009.… Read more »

Chickybeth
Chickybeth

@Tyler #12 Check out SmartyPig (www.smartypig.com) I’ve been using them for a while and they are great. Right now, I am saving for a house down payment and the interest rate there is 2.01% (and has been for over a year w/out going down). The customer service is great and there is even a chart to track your progress towards your goal. No CD I have seen recently is over 2%, so I will continue to stay at SmartyPig (and ING for EF savings). P.S. To Crystal #20 There are only 2 downsides (if you consider them to be) IMO:… Read more »

Buddy
Buddy

I think its important to consider the sales charges (loads) and expenses associated with any mutual fund in which you invest. They represent an above the line deduction from your return. The Vanguard & Fidelity funds you mention are all great: they are no-load and have annual expenses of .21%, .38%, & .45% respectively. However, there are a lot of funds out there that charge 3-5% loads and up to 1-2% additional for annual expenses. That’s a 4-7% deduction from your return.

Bridget
Bridget

Well, as one other commenter said, it all depends…on what you want for that money: short, mid or long term savings/investments. For short, you wouldn’t usually put it in a stock or mutual fund as the horizon on that is mid or long term (except for income producing – yet another category). I think it is important to know the timeframe in which you desire to use the money in order to determine the best place to put it. Example: I have money to buy a house for cash in a 2 year CD – I won’t need the money… Read more »

Stephen @ Financial Services
Stephen @ Financial Services

Thumbs up to J.D. about affiliate links. If I were to manage a personal blog, I would do it this way too. The extremes of blogging are; maintaining a blog that takes away your valuable time without even having something in return (that will of course reciprocate your effort) and maintaining a blog and posting all the form of money making imaginable. I think this blog is not doing those both. Of course, if you write a good post, most of the time, you’ll reference other entities or businesses like banks etc. Putting some affiliate link is just to maximize… Read more »

Nicole
Nicole

@19 JD… how about an * next to the link to a footnote that says

*affiliate link

Crystal
Crystal

Thanks Chickybeth (#22)! I’m more than okay with both of those downsides, so I’ll be opening a Smarty Pig account today. 🙂

Anonymous
Anonymous

Sometimes when I hear that interest rates are going to drop again, I get a CD. Occasionally my bank will have a weird short-term offer on CD’s and I might get one then. I have two now from such special offers. I used to love I-bonds when they paid 3% (or more!) over inflation. When they pay nothing over inflation, I am not a fan. TIPS seem better, but I’m still learning about those. Meanwhile, I agree about paying off the mortgage. Last time I read about some special deal on CDs, I decided to make my own special deal… Read more »

Des
Des

@Jon #9

There is no Zopa here in the States anymore. Prosper is the same idea, but it is crazy risky. People get really excited about the returns when they first start, but after a couple years once the losses trickle in its not worth the risk.

Chickybeth
Chickybeth

@Crystal One more thing I just thought of: when I first opened my account at SmartyPig, I was a little confused because they pay interest quarterly instead of monthly. I’m not sure how much of a difference it makes over time, but they do have a feature where you can see how much interest is earned each day which is handy. The way I look at it, it is money I am not going to touch for a little while anyway and the site itself is so motivating, it has helped me save a lot more than I would at… Read more »

LiveCheap.com
LiveCheap.com

Right now the low risk investments are yielding less than inflation so while you may get 2%, you are losing every day to inflation. However, if it’s safety you prize, CDs and money markets are good choices. In search of yield there are some good dividend paying stocks out there but of course, they can always cut the dividend. I have been researching Master Limited Partnerships which currently yield 7% and have the possibility of appreciation (of course they can go down in price too). Think of companies that do nothing but move around energy around the U.S.: natural gas,… Read more »

Erica Douglass
Erica Douglass

I still like LendingClub if you’ve already built up a cash emergency fund. I put $25K in there last year, and 10 months later, I’m still earning over 11% and my $25K has turned into $26K and change.

I also have tons of cash in ING Direct and others, but LendingClub offers a pretty good alternative.

-Erica

Jay
Jay

I will pimp USAA to the ends of the Earth. Get me a big hat, silver tipped cane, and Joseph’s technicolor dreamcoat and I will prance up and down Front Street singing their praises. I have had them for 5 years now and have been impressed with their service, product offerings, and website. Heck the deposit a check feature via your Iphone is worth my business alone. As mentioned in comment #4 by Karla, all honorably discharged veterans regardless of when they seperated from the military are now able to join. You could be a WWII veteran who got out… Read more »

RJ Weiss
RJ Weiss

I’m prepaying my mortgage with any extra income we have over our expenses. It’s a guaranteed 5% rate of return, and more importantly, this decision is congruent with our goal of paying off the mortgage before 30.

Ken
Ken

You’re right about a checking account can sometimes be the best place to earn money on your savings. Several reward checking accounts are still paying 4% APY. But there are better resources to find reward checking accounts than CheckingFinder. Search Google for “reward checking”.

Adam
Adam

USAA is great for customer service and their insurance line. For saving, they are, unfortunately, quite horrible. In less than two years their “performance” saving line which has a minimum investment of $10,000 went from over 5% APY to less than 1%. They are currently sitting around 0.8% APY at the highest tier of returns. This is pathetic compared to almost every other bank out there, even during the economic down turn.

Megan
Megan

I just got an American Express savings account. The interest rate is 1.5%. I guess I’ll find out about the service, but opening the account was relatively easy.

Manisha Thakor
Manisha Thakor

JD – Think you make an EXCELLENT point to highlight paying down your mortgage as an alternative use for “extra” funds above and beyond your emergency fund on which you wish to earn a “safe” return. Paying down your mortgage gives you a GUARANTEED return – something you won’t get in stock or bond funds (which unlike owning individual bonds until maturity, can result in a loss of principal if you have to sell during a period of rising interest rates). My rules of thumb are for extra cash: 1. Build out an emergency fund (6 months minimum, I keep… Read more »

Crystal
Crystal

@Chickybeth
I noticed that Smarty Pig paid quarterly, but we decided that didn’t matter. I like the interest rate and the emergency fund money was just going to be sitting at ING anyway…might as well get 2% on it instead of 1.2% if it’s just going to be padding anyway, right? 🙂 Thanks for bringing it up!

Lori
Lori

I moved all my checking/savings money into a Kasasa Cash account at First Arkansas Bank & Trust last year. (I live in Colorado). So far it has worked very well. The APY is currently 3.5% as long as you meet a few monthly requirements. This account has enabled me to make earn a much better yield on my liquid money than other banks. I also don’t have to move money between my checking and savings account any more which is nice.

http://www.firstarkansasbank.com/personal/personal-checking/kasasa-cash.html

The Broken Penny
The Broken Penny

@12 Tyler: I would avoid index funds for money you are looking to use within 5 years. When I was building up my down payment fund 3 years ago I was tempted to do the same, thankfully I did not or I would not currently own a home. While index funds are a great investment in the long run, they are too risky for short term savings. Great point about paying down your mortgage. For those who do not want the risk associated with stocks and bonds, but are fed up with low savings rates, then paying your mortgage is… Read more »

Crystal
Crystal

@Manisha (#36) I almost completely agree with your rules of thumb. If you have enough money to hit all four of your points, that is exactly how I’d do it. If you don’t make enough to completely max out your 401K (>$16,000 a year), like my husband and I, I’d suggest these steps: 1. Emergency Fund for at least 3 months (see below for the rest). 2. Maximum matching to your 401k and max out at least one Roth IRA. 3. Overpay your mortgage to at least the nearest $100. We overpay to the $100 after that…an extra $160 a… Read more »

Sara
Sara

I will definitely look into some of these. I have way too much money sitting in my checking account earning pathetic interest. Even the interest rates on my “high-yield” savings accounts suck. I still want to keep some money in safe investments, but I’m willing to take a little risk for potentially higher returns. Hindsight being 20/20, I sure wish I had put some money into long-term CDs back when interest rates were upwards of 5%! I used to do CD ladders, but when high-yield savings interest rates surpassed rates on all but longer-term (2+ years) CDs, it seemed crazy… Read more »

john78
john78

Is ING also sponsoring many of these posts in addition to the content on the blog? A few of these posts sounded like pure astro-turfing for ING… I have an ING account also but how anyone in their right mind can excuse them paying out little over 1% in interest (not even keeping up with INFLATION!!!) is beyond me. I’ve immediately begun the process of moving my money into a few rewards checking accounts that I treat as savings accounts. I top them off with the money I have budgeted for the month and reap 4.5% interest on my savings… Read more »

Mike Piper
Mike Piper

A quick note in reply to comment #41: Index funds don’t have to be risky. Stock index funds are risky.

Other index funds (a short-term Gov’t bond index fund, for instance) can carry less risk.

J.D.
J.D.

@john78 (#44)
I’ve never written a sponsored post and never will. My editorial independence isn’t for sale. If I’ve enthused about ING Direct, it’s because I use them and love them. Are there other banks that pay higher rates? Sure! And some of them offer affiliate programs, too. But I don’t write about them because I don’t use them.

Beata Sasinska
Beata Sasinska

I also agree with the people who recommend SmartyPig. I have an account with them and it is great. It works well for short to medium term goals, such as saving for vacations, holiday presents, and a down payment. My favorite part is that when you close a goal, you can get the money on a debit card or a giftcard. Another thing is that it shows you how far along you are to your goal, which for me personally makes me want to save more. Though I do agree that it takes forever to get the money in/out, but… Read more »

Max
Max

JD: Perhaps you should just rewrite your disclaimer to be a little more specific about why. Instead of saying ‘may receive payment’ say ‘This blog uses affiliate links’, maybe with a link to an about page with what affiliate links are.

Andy Hough
Andy Hough

I have my cash savings in a reward checking account. It pays 4% and is FDIC insured. Kiplinger’s advice on taking a little risk seems misguided since their suggestions yield less than my risk-free 4%.

mike
mike

Another fan of USAA and ING. USAA is my primary bank, and ING is where my emergency fund and rainy day savings are.

One note about USAA that I didn’t see in previous comments – descendants of military personnel can also have USAA accounts. My account only exists because my wife’s grandfather was Air Force active duty. He opened an account way back when, then his son (my father-in-law) opened one, then my wife opened hers. Eventually, I’ll open accounts for my kids too.

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