California Personal Finance, Low Risk, Low Return
Personal finance has always been a matter of making choices. Back in the 1960s there weren’t many choices. These days, there are sometimes too many choices. With choice, comes risk, and the biggest risk may be the risk of making a bad decision.
Some finance choices are low risk. Some are high risk. Another key component in our decision-making is reward. There are small rewards and large rewards. The common wisdom is that low risk inevitably means low reward and higher risk leads to possible higher reward. This isn’t always the way life is, so today, we’ll look at relatively low risk finance – savings accounts.
Savings rates for savers haven’t been looking good for the past two years, and just as California savers were starting to get their own houses in order, reducing spending and saving more, along came the government, printing another trillion dollars and devaluing the dollar and the value of those additional savings. At the same time, interest rates dropped and the value diminished.
Where to get the best rates
You really have to shop around to get the best rate because rates cover a huge range. Banks and credit Unions are all around the same, other than the occasional institution looking to gain market share. Most rates this month are hovering around 1%, with some down as low as . Many of the banks have minimum deposit caveats, so you need to check for that.
Ally Bank is continuing its quest for market share, placing no minimum limit on your balance, with a 1.24% rate on the Money Market Account, so this is a good one for new savers just starting out.
Does the rate matter?
I don’t think it always pays to nit-pick the rate, especially when they are so close, and the rates are so low. There is almost no difference between 1% and 1.2% unless you have a lot of money. Remember, this is 1% per year, so if you have $1000, 1% interest is around $10 and 1.2% interest is $12.
Daily Compounding
Some banks have daily compounding, while others are monthly or quarterly. Again, when rates are low, it doesn’t make much difference. It makes more difference when you have more money and when you hold the account for much longer. As interest rates rise, the difference in the compounding freuuency is more marked, so you may want to choose daily compounding to take advantage or rising interest rates. The Federal Reserve probably isn’t going to let savings rates get too high, so that probably isn’t something to hold your breath waiting for.
Overseas Interest Rates
One interesting thing to note is that other countries have higher rates, for example, in Australia right now, banks have savings rates between 6.0% and 6.5%. Trying to play with overseas accounts can be done, but it isn’t easy, and if the differential between the US and their currency changes the wrong way, you can lose more than just the interest. Also, remember there are fees to transfer money in each direction and the bank also discounts the exchange rate in their favor, so playing wot overseas rates can be very risky.
Internet Banking
One other interesting idea is internet banking. Internet banking lets the banks provide services with little human intervention and therefore lower cost. That is the reason ING Bank has done so well recently. ING kept their costs down, gave good interest and made a lot of friends. Now many other banks are playing that game too and ING has lost the great edge they has before.
Some Examples
American Express now has a high yield online savings account that pays 1.15% and a 12 month CD paying 1.45%. They have a $0 minimum, Discover has a 1.20% rate, but with a $500 minimum balance. The standout performer right now is Downey savings, with their Summer Survival Account that pays 1.99%.
You always need to do your own investigation, because even though we point out things to look at, there are so many other variables in play, that you need to see if a particular account suits you.
