For the first time in a decade, some savings accounts are matching inflation. Some are even beating inflation by a small margin. This is a big deal because for the last 10 years savings accounts have yielded less than inflation, meaning that you you were actually losing buying power the longer you held cash. If you hold cash in the right place, you no longer will be punished just for holding cash. I recently wrote an article about safety net savings and different strategies of where to keep them. I did not recommend high yield savings accounts in that piece, but with rates increasing between then and now, it has become reasonable to keep a large portion of your safety net in a savings account.
Yes, I am excited about 0% real yield.2004 Kelton reminiscing about interest rates
It’s almost comical to say that I am excited to make nothing on my money. But that’s the truth. When holding cash, real yield, the yield after inflation, can now be 0% and that is a good thing. I am much happier to make 0% in real terms than to lose 1-2%. To yield a real 0%, you have to yield the same amount in interest that inflation devalues your money. In other words with inflation currently at 2.2%, according to the United States Department of Labor Consumer Price Index (CPI), you would need to yield 2.2% to make it back to 0% yield. Anything less than that will mean you are slowly losing money each year. Anything more than that and you have growth.
Seven Banks Stand Out With Superb Rates
I will not discuss any small banks or credit unions that make you jump through hoops to make higher yield. Most of those companies are regional and they often have poor service. The rates may require minimums and maximums or even be bait and switch rates. All 7 of the banks below have great rates and good service, at least as far as I can gather either from personal experience or from general online sentiment. There are also some other banks that did not make this list (like CIT bank) which have good rates and are probably decent banks. CIT was not included because it requires a $25,000 balance or an automatic savings plan to get a competitive rate. There is no reason to over complicate your savings when other products are simple. As always, your mileage may vary so do your research before opening an account.
Some of the best FDIC-insured savings accounts (as of December 2018):
|Sallie Mae Money Market||2.20%|
|Marcus (Goldman Sachs)||2.05%|
|Capital One Money Market||2.00%**|
*PNC Bank has a $25 penalty for closing your account within 6 months of opening. This really should not be much of an issue because there is no limitation on withdrawing your money but only a limitation on actually closing the account. You could conceivably withdraw all but one dollar until you can close the account at 6 months.
**Capital One has a minimum $10,000 balance requirement to recieve this rate. It is included because it is the largest full service bank to offer a rate this high.
Of the banks on the list, only Capital One and PNC are full service banks with all the bells and whistles. The other banks are more focused and do not have all the features that you may or may not care about when merely looking for a place to park your cash. Unfortunately, Capital One is no longer leading the pack like it used to when the high yield account was part of ING known as ING Direct.
Of all the banks, my favorite option is American Express. They are very financially stable at this time and they also reportedly have great customer service. Importantly, of the banks listed, American Express and and Sallie Mae are able to yield the same as inflation while PNC bank is able to beat inflation.
While I think American Express is the best option for me right now, I think PNC bank should also be considered. However, I do not like that you cannot close PNC for 6 months. I like to close up loose ends right away and so I would rather go with American Express or Sallie Mae than PNC, even if I give up a tiny bit of interest.
Keep An Eye Out For New Offerings
Recently, there has been a lot of hype about Robinhood’s
checking and savings cash management account, yielding 3%. This is still a dream and not reality but I will look into it if the product ever launches. Also, the TMobile 4% account sounds like a really good deal, but right now it is by invitation only for certain TMobile customers.
Alternatives to a High Yield Savings: ETFs and Money Market Funds
I still believe that ultra short term bond ETFs and low-cost Money Market Mutual Funds are a great option when your time horizon is a little longer than next week or next month. There is a little more risk involved, but that risk is amply rewarded with higher yields. Some ETFs that I like as well as my favorite money market fund are listed below.
Alternatives to Savings Accounts:
|iShares Short Treasury Bond ETF||SHV||2.24%|
|SPDR 1-3 Month Treasury Bill ETF||BIL||2.13%|
|Goldman Sachs 0-1 Year Treasury ETF||GBIL||2.24%|
|Wisdom Tree Floating Rate Treasury ETF||USFR||2.23%|
|iShares Short Maturity Bond ETF||NEAR||2.90%|
|SPDR Floating Rate Note ETF||FLRN||3.01%|
|Vanguard Federal Money Market Fund||VMFXX||2.24%|
To be honest, when compared to the American Express savings account, many of the ETF yields feel lackluster. Of course, if you were to mix 20% NEAR or FLRN with 80% SHV or BIL, the ETFs will yield much better than the savings account, albeit with more fluctuations over time because ETFs trade like stocks and values regularly move up and down. Ultra short duration ETFs, like those listed, tend to fluctuate very little but they do still fluctuate on a regular basis and there is risk.
Betterment’s ETF Smart Saver Option is Lackluster
Betterment is an awesome company and they manage my Roth IRA. That said, they also have a product called Smart Saver that invests 80% in SHV and 20% in NEAR. The product sounds wonderful until you realize that they charge 0.25% to do this simple two-fund portfolio. I understand that 0.25% is fair when it comes to managing a full investment account. However, giving up 0.25% here turns Betterment’s ETF Smart Saver solution from a class leading 2.34% yield to a meager 2.09% yield. Because this is less than the yield of several different savings accounts, this is a poor solution.
The best way Betterment could fix this problem is to drop their management fee to 0.10% for the Smart Saver Product. This would put their yield back at a competitive 2.24%. While I cannot recommend the Smart Saver product at present yields and fees, I do still recommend Betterment as an investment platform. If you sign up for Betterment using my referral link, it helps me out and also gives you 90 days managed free.
Why Savings Accounts Are Attractive
Savings accounts with their stable value are better very short term places to stash your cash. You won’t lose 0.3% over a month in a savings account ever unless you withdraw the money and spend it. With ETFs, you could see a 0.3% downward swing and, for a very short term savings plan, that would eliminate any benefit of seeking yield in the first place.
The Downsides of Savings Accounts
Longer time horizons will probably be served better by investing in ultrashort term bond etfs when conservation of the initial deposit is very important. This is especially true if rates continue to rise (the Fed recently said they plan to raise rates two times in 2019). When rates rise, a savings account only needs to raise rates if its competition raises rates. With an ETF or money market fund, the fund must pay out the additional earnings because the manager’s share is a fixed percentage regardless of how well the fund does. In other words, ETFs are designed to benefit the investor with more upside in return for taking more risk while savings accounts have less risk but an upside that tends to only adjust with pressure from competitors.
What Do I Recommend?
I think you should hold super short term savings in a savings account like the one offered by American Express. Anything that you are saving for a longer time, or that you do not know when it will be needed, will likely benefit from being held at least partially in ETFs or money market funds which yield higher than a savings account.
Also, if markets crash, all asset types can become correlated in the very short term (panic selling can lead to even short term bonds falling in value temporarily), so having enough cash reserves in a high yield bank account can protect you. Additionally, putting your money with a financially stable bank like American Express should insulate you from bank failure and make the chances of having to claim FDIC insurance very unlikely.
While I do not currently have a bank account with American Express, I plan to open one soon and fund it with several months worth of emergency savings. I will continue to hold some of my savings in a mix of USFR and FLRN because of the attractive yield.
Disclosures: I am long FLRN and USFR. You should never buy an investment product or open a bank account without completing your own research and considering risk. This article was not sponsored by any of the companies discussed.