Ditch banks – Go with money market funds and treasuries
thefinancebuff.com
thefinancebuff.com
If I put £100 in a savings account with 4% interest, I can withdraw that £100 (plus interest) at any time.
If I buy put £100 into government bonds with 4% yield and I check back in a year's time, if bond yields have increased (say, due to increased base rate) then the "balance" I can withdraw is _less_ than £100, since the underlying bond is less valuable!
Putting money in bonds exposes you to market volatility, which banks shield you from (which is why they get to take a cut)
Edit: a money market fund appears to absorb this volatility for you by balancing their bond portfolio, but ultimately you are still relying on the fund being well managed. The failure mode here isn't the govt not paying the coupon on the bond - it's the fund not having the liquidity to pay you if you withdraw. I don't understand enough how money markets are regulated to understand the risk, whereas banks are required to have deposit insurance in UK & US.
https://www.sipc.org/for-investors/what-sipc-protects
https://investor.vanguard.com/investor-resources-education/m...
And frankly if that's the case I wouldn't be betting on FDIC or equivalent insurance actually working anyways.
But even "less" secure ones are heavily regulated to be kept at 1$ of NAV and SPIC backed.
Convenience is easily worth it.
Also, an important note is that none of the major banks in the US pay 4% or anywhere near that amount on deposits. Think 0.01%.
Long term bonds, as you correctly point out are extremely sensitive to changes in interest rates.
In the current (rather unusual) situation, where deposits pay nothing and short term Treasuries pay reasonably well, this advice is sound.
However, a shock at the wrong time can cause those "safe" T-bills to suddenly be much less than what was paid for them. Something similar happened to Silicon Valley bank - it wouldn't have been a problem if their depositors hadn't all demanded their money at once, but these are the scenarios that banks are regulated to avoid.
The only situation where the value of the fund can be less than what you put in is the collapse of US currency, which savings account insurance can not protect against either.
I don't think so: suppose the company offering the fund was mismanaged and failed to comply with the regulations. Maybe not likely, but definitely more likely than the "collapse of US currency."
If you have more than 500k of assets in this form, you should have multiple funds and bank accounts.
Again, you need the collapse of the US currency if you are a) not exceptionally wealthy or b) not wealthy and incredibly financially uninformed.
FDLXX 7-day yield is 4.93%. 99.5% exempt from state income tax.
The most recent 4-week treasury is 5.24%. Exempt from state income tax.
There is very very slightly more risk in the FDLXX MMF than a savings account.
I started using Fidelity as my primary "bank" years ago and haven't looked back.
But once you sit down and compare features, absolutely nothing comes close to Fidelity.
There is also something to say about diversification across finance orgs. I am not sure having all the funds for banking and investing using the same org is healthy. Diversification helps with SIPC/FDIC/FCUA coverage too.
I don't use an MMF as an investment vehicle. It holds my daily cash. I can't use Vanguard for that sort of thing, so it's not an apples-to-apples comparison. Excess cash (e.g. emergency fund) is in an auto-roll 4-week treasury ladder.
I was previously a Vanguard customer. It's not like I don't have experience with both Vanguard and Fidelity. I understand the trade-offs.
In above account, you can also make selections here to not need to pay state tax on earnings, but that doesn't apply to me anyways. Nice for people in high tax states, though.
Paper checks in a checkbook. This is something you'd assume is standard but actually hard to find at online banks today.
Debit card with ATM fee rebates worldwide. I don't travel worldwide much anymore, but there's only 3 or 4 banks total that do this and it's a nicety.
Instant P2P between accounts. I often send my wife money for various reasons. This is another one that's surprisingly not standard at a lot of banks.
Free same day wires. Very straightforward, no hassles here, though I've only used it three times.
Customer Service. When you call them, someone in the US answers within a few seconds. They'll talk investing with you, goals, or general troubleshooting things. They also call to check in about twice a year which I find annoying, but some people might like it.
Money guarantee. Luckily I haven't had to use this yet, but any money stolen from hackers/fraud is supposedly 100% covered by Fidelity.
Which would you suggest between Schwab and Fidelity? Is it something I can/should easily do by myself as a financial layman? I have no experience with either of them, though I am slightly leaning towards Schwab since they have some tie-ins with American Express whom I like.
Trying to read up on this is almost worthless because past a certain point it's all just snake oil peddlers wanting me to part with my money (eg: all the Vanguard fanbois).
As for Schwab vs Fidelity, your money is in safe hands with either. Might want to call and talk shop with both, and choose whoever you feel gave you better answers, all other things equal.
Vanguard has low fees, but it shows in every facet of their existence. I don't hate it, but I'll make marginally less money perhaps for better experience. YMMV.
I'm more than likely going for a Roth IRA given my income (well below threshold) and a strong desire to just keep things simple. Traditional IRA with tax deductions sounds nice, but it's also overhead and effort I just don't want to deal with regardless of potential tax savings (and I need to pay the taxes eventually anyway); the old saying that time is money.
It's great and much appreciated to hear from someone who's not marketing at me that Schwab and Fidelity are more or less objectively the same. That means the deciding factor is simply which one I'm more biased to, which means Schwab (aforementioned AMEX tie-ins).
Many thanks!
If you hit the limit of what you can put in a Roth IRA (good choice) and still have money to save, I Bonds through treasury direct are something to consider.
On the other hand, Schwab has an actual bank as a subsidary if I do want to use them also for banking, which is great for feeling reassured as a client/depositor if I want to diversify my current banking with US Bank.
Schwab also has those AMEX tie-ins, which is again reassuring because I really like and respect AMEX. Yeah it's just marketing, but damnit if it isn't effective. :V
Though either way I'm not concerned with the finer points of brokerage-banking or investing right now because I'm not sure if I will get into the whole investment money games beyond a Roth IRA. Maybe I will, but I can worry about that when I get to that point.
But they're both good choices. I remember when paying $15 for a stock trade was considered innovative. But the most recent Schwab website changes I experienced, maybe a year ago before I switched everything over, were a step backward.
I have the Fidelity 2% card and it's great.
I would have stayed with Vanguard forever if their website didn't suck and their brokerage services didn't also suck. They really were a leader for a while.
I'm getting 4.4% with Apple.
Literally all you have to do is just stop using shitty megabanks. It isn’t even hard.
Tell us you don't live in America without telling us you don't live in America.
Anecdata: Bank with US Bank, enjoying 4.16% interest.
Besides, just because you don't know US Bank doesnt stop it being a poor personal decision to bank with Chase when you know they give bad rates.
Specifically, Wells Fargo, Chase, and Bank of America still offer "savings" accounts with APYs of around than 0.05% APY as in way less than 1 percent.
0.05% APY https://www.wellsfargo.com/savings-cds/platinum/
0.01% APY https://www.chase.com/personal/savings/savings-account/inter... - https://imgur.com/a/eFILVca
0.03% APY https://www.bankofamerica.com/deposits/bank-account-interest...
US Bank is the 5th biggest and 2nd oldest bank[1] in the US and currently has a money market savings account with 4.25% APY[2][3] for balances over $25,000 depending on your location, if they are not major then neither are any of the others.
If you don't know US Bank, as was the case with another commenter, that is not my problem.
[1]: https://en.wikipedia.org/wiki/U.S._Bancorp
[2]: https://www.usbank.com/bank-accounts/savings-accounts/elite-...
By the by, for those who don't have $25k in cash to sit around (which is a whole other conversation), if you look around, there are places with HYSAs that don't have that minimum, so I'd suggest putting your money elsewhere.
But let's pretend you're right and that I hadn't heard of US bank's HYSA. Instead of claiming that not knowing about that must also make me not a person of the USA, but also that it is my problem, which is a very American way to respond to something, so bravo there if you wanted to give the impression that you were), you shifted the conversation away from your earlier claim that not knowing about US Bank's HYSA made them not American and instead goaded me by trying to make projected ignorance of their offering my problem, and not a trait inherent to non-Americans. Good luck with that.
The claim was that no major American banks offer ~4% interest on deposits.
I demonstrated that such a claim is wrong. Twice.
If you don't know the banking situation in America for one reason or another and aren't actually qualified to talk about it, that is not my problem.
Tell us you're not American without telling us you're American.
If most Americans aren't aware of a thing, it's not a good signifer or use of that statement.
Keep it classy, questioning my qualifications and saying that's my problem on such a basic topic isn't a good look.
A money market fund operates differently from holding individual bonds and aims to provide you with the ability to sell at any time without a loss --- but the monthly interest paid out will fluctuate according to market rates.
You can purchase multiple bonds that are spread around their term duration. E.g. buy now 1-year bonds, and repeat every 3 months. After 4 such cycles, you will now always have bonds reaching maturity every 3 months.
Or just buy shorter term ones to begin with (if the interest is still appealing), and move to longer term ones once you have enough maturity diversity for the advice in the previous paragraph.
Unlikely ATM while rates are expected to fall.
The tax treatment is a tiny bit different. T-bill interest is exempt from state/local tax. CD interest is not.
Default risk is the tiniest bit different, but not by much. With the CD, there is some probability that the bank will fail, at which point you then need to wait for the gears of the FDIC to slowly turn to pay you your CD insurance. The FDIC actually doesn't have that much money, so in a sufficiently large bank run the Federal Reserve will have to backstop it. On the other hand, you can just buy a T-bill directly from the Treasury, which is also backstopped by the Fed. So there are some additional middlemen in the case of the CD. Maybe that's good -- more failures in a row are necessary before you get to the Fed. Maybe that's bad -- there are more parties and more bureaucracy involved in the unlikely event of a bank failure. I think you might as well go straight to the Treasury for the high rate and better tax treatment.
(Or I'd plow it into the S&P 500 because T-bills ain't never gonna outpace inflation, no matter what they say the numbers are.)
If you have £100 then go eat a sammich :)
If you have £100k then it is worth 'spreading' it in various assets, including what the article talks about.
There is also a 'recognised practice' that slowly/over time you move some of your stocks/indexes/etc. positions into bonds as you grow older/getting close to pension. Unless you got enough ££££ in the bank and you plan to leave your portfolio as inheritance, in which case leave it where it is.
> While we can't guarantee there will be a market for it, we'll help you sell the CD at the current market rate by requesting bids on your CD and contacting you with the highest one. If you decide to sell, you'll receive the bid price plus any accrued interest. There are no guarantees that you'll get what you originally paid for the CD.
[1] https://www.schwab.com/fixed-income/certificates-deposit
They are a valid alternative for fixed term deposits (and vastly more tax efficient for higher earners)
With CDs some of these dynamics are more hidden, because most people cannot access a secondary market for their CDs and do not see what they are worth on a given day. They just hold to maturity. But --
-- you can also just hold a bond to maturity, and
-- if you buy your bank CD through a brokerage account (e.g. Fidelity, Schwab), then you can sell it early on the secondary market, for whatever a buyer will accept.
So there's less difference between bonds and CDs than people suppose.
(There is also the issue of default risk when the issuer of the bond is a private company or untrustworthy government. But I would say that US Treasuries and FDIC-backed CDs have similar low default risk, and you can make an argument that the T-bill is actually safer.)
It is true that money market accounts have liquidity crunches (i.e. "break the buck"): https://www.investopedia.com/terms/b/breaking-the-buck.asp
Governments have a lot of vested interest in preventing that from happening, but it's not a guarantee on the level of FDIC.
EDIT: Just realized I misread the article, and they are talking about money market funds, not money market accounts, which are different things. I did not realize brokerages allow money market fund assets to be treated essentially as cash balances, which is basically what a money market account does.
( "The best time to plant a tree was 20 years back. The second best time is now" is the quote that I repeat to not fall into that regret trap )
It's eye opening, it feels like I got lied to growing up. Both of my kids have money market accounts now.
Great quote btw, I'm reminded of it regularly.
Be careful with treasuries, during times when the Government is heading towards default otherwise pick the highest yield and lowest fee option, SGOV offers the highest yield right now, here are the latest rankings, based on yield and fees: https://blog.maxint.com/treasury-bill-etf/ unless you don't want to pay any fee and do it yourself via https://www.treasurydirect.gov/
There are a lot of money market funds, make sure you read their prospectus to understand where they invest your money. VMRXX offers the highest yield right now, here are a few more: https://blog.maxint.com/best-money-market-funds/ which are also a good alternative when the Government is heading towards default.
Prioritize based on your needs and financial circumstances, starting with MMFs, treasury ETFs and lastly consider bank accounts for a small % that you need to have available on-sight. This is not financial advice.
Usually, transfer is also more difficult with a brokerage than a bank; correct me if I was wrong: a) brokerage follows a previous T+3 settlement, now T+1, some banks offer a faster settlement, especially if Zelle is directly available; and b) while doing international wire, the bank is considered a viable target, but brokerage don't, a broker has to use their account opened at a bank, it could be cheaper, but there is more hassle (e.g., some government would allow this for non-business purpose).
But if you are just parking money, these brokerages offer a much better deal; many even offer to reimburse your ATM cost.
For longer term investments I hold my nose and suffer through the Treasury Direct website.
(lots of detail that might be potentially unhelpful, but I hope it helps others, the plumbing is easy if you know the primitives; Chase is horrible, I do not recommend, Schwab, Vanguard, or Fidelity is the way)
My father in law once purchased a home with “cash” and sent an $800k same-day wire (vanguard or fidelity - i forget). Also went through successfully.
First time i’ve heard of this. Can you share more details? Any reading material?
It has to do with KYC, in many cases, and being a brick and mortar bank doesn't help. There are heaps of horror stories involving Chase, WF, BOA, etc freezing money up.
For me, Fidelity IS my bank for daily life. I only go to a physical bank like chase / bank of america if I need to deposit cash, or i need to withdraw a lot of cash.
Can I ask why?
But it’s the same with banks too. The only difference is there is one fewer party in the transaction to trace (whereas Fidelity has to work with UMB which is their bank partner).
But the probability of a hold is the same, which is usually very low. I’ve been with Fidelity for over a decade now and have never had large transactions held.
The point is that if I demanded money from you, you can give me your money out of a bank immediately, simply by walking into one. You cannot get money out of a brokerage account for me. You need it transferred for you to a bank first before it becomes your money. This is an actual difference to me who wants money from you now and it's not in theory.
I guess for me it’s extremely rare for me to need (large amounts of) money “now” apart from daily needs but that’s usually charged to my credit card and paid off from my Fidelity cash management account on an interval.
I can see in emergency situations where that is true. But the currently level of liquidity that I get with brokerage accounts + cash management account works for 99.99% of my use cases.
I’m willing to take the higher interest in MMF for what is a negligible impact to liquidity for my use cases.
There's plenty of ways where missing the payment date means you lose your deposit which can be tens of thousands of dollars.
Please elaborate. Which one requires 1-day turn-around ?
Who wakes up one day and decides they're buying a house today, without any prior planning?
To be honest I want as close to instant as possible. If the FTSE100 drops 15% then I want to be there to buy it before it pops up again.
My house deposit in Toronto. Offer was accepted and we had to get a portion of the deposit ($5k) to the sellers broker within 12 hours. I banked with an online bank at the time Tangerine and we had to drive to their only office off Steeles to get the draft same day. I stopped banking "online only" after this.
Elevator deposit when I moved into my apartment. This was their fault because they never told us prior.
But there are a multitude of different scenarios. Bail money for example.
It's the same rate they have for savings... they've previously had competitive savings rate, but they have been raising rates slowly this time.
I had thought the online high yield savings accounts also had high yield checking, but I don't see much currently. I only saw one offer from a bank whose name I don't recognize.
Some of the brokerages offer a checking account that sweeps into money market, or checkwriting against moneymarket holdings, you can look around a bit there.
i.e. for simplification, try to get all bills to come out on the 1st, then make sure that $20k hits the account on the 25th. For the rest of the month it can be empty.
I always keep a balance in my checking to ease my mind, but the bulk of my monies I keep in a savings account next to it and I transfer as needed prior to paying the bills.
1. https://www.nerdwallet.com/article/banking/how-regulation-d-...
If I screw up (shit happens) I have overdraft protection so the checking just pulls from my savings with no overdraft fees, but ideally this never happens.
Of course, none of this actually matters because transfer restrictions on savings accounts were lifted as pointed out by a sibling commenter. The only reason I don't just pay straight out of my savings is because I simply prefer to keep outgoing monies to my checking account.
I'm comfortable with holding significant amounts in a Government MM fund, but less so with Prime MM funds.
Or just buy the Treasuries directly. Why pay a fund to do it for you?
Otherwise buying short term treasuries is quite easy on most brokers. The downsise being it may not be as quick to sell on the secondary market when you need to cash out unless you get competitive with the sell terms.
Some brokerages may have better liquidity and/or prices than others.
It can be prudent to have multiple cash holding types in case there are issues with some of them.
1. Buying US dollar money market funds will add a whole level of currency risks which you might not want.
2. Using a foreign broker is a tax nightmare in Germany.
Apart from that the German broker market is highly competitive with multiple choices where you can buy European money market funds basically for free.
If you speak German, check out this article about money market ETFs as an alternative to savings accounts: https://www.finanztip.de/investmentfonds/geldmarktfonds/
That interest rates change is global.
The author does get into it more here: https://thefinancebuff.com/best-vanguard-money-market-fund-y... , but there isn't one clear best for everyone.
Interesting, the linked article says this:
> Vanguard Federal Money Market Fund (VMFXX) is the settlement fund in a Vanguard brokerage account. You don’t have to do anything extra to buy or sell this fund. It requires no minimum investment. Any cash you transfer into your Vanguard brokerage account will automatically land in this fund.
I didn't know that. It definitely has better returns than most savings accounts. Instead of parking money in a savings account you could just leave it there until you decide whether to invest it or transfer it out to do something else with it.
For tax advantage, I've recently found out about BOXX. You get roughly the same growth as a typical HYSA, but the value is added as actual value to the stock rather than dividends. So if you hold for at least one year, you can get HYSA interest but only pay capital gains tax.
https://www.reddit.com/r/investing/comments/1eremcy/comment/...
https://thefinancebuff.com/treasury-bills-cd-money-market.ht...
Whats that about a fool and their money easily parted? Why yes, chasing the highest return IS a good way to come unstuck. What do you think those extra points of interest were held back for in the first place?
FDIC is to make the unsophisticated comfy with parking their savings for pitiful rates at commercial banks making the spread. Their margin is your opportunity.
I recommend you do some reading to learn more about it.
if us treasury fails the last thing im worried about is my my bank okay
The risk of e.g. Vanguard doing this is also probably negligible.
Although, I would suggest to buy the treasuries directly and not pay a fee to any fund.
Definitely not FDIC insurance.
A "Capital One 360 Performance Savings" account gets 4.25% APY with full FDIC coverage.
A "Capital One 360 Savings" account gets like 0.2% APY with full FDIC coverage.
Clearly they don't actually need to eat 4% APY in order to get FDIC, or else the first type of saving account would be a bad one to offer.
Anyway, the FDIC is a promise from the government that they'll cover your cash, and so is a treasury. Treasuries and FDIC insurance both have roughly the same risk, which is that of the US government collapsing entirely.
It's hard to say what the outcome of such a move would be, but one possibility is Treasuries taking a large haircut, but without triggering the sort of collapse that would swallow FDIC along with everything else.
I prefer Treasuries in my taxable accounts as there is a break on State taxes for the interest generated. I hold CDs in my non-taxable retirement accounts as they tend to pay a few tenths of a percent higher.