Would I get higher interest from cash in a mattress?
March 5, 2012 2:24 PM   Subscribe

PersonalFinanceFilter: Given the near-zero interest rates these days, what's the best strategy to use to allocate savings?

Background:
Given the Fed's plan to keep interest rates near-zero through late 2014, is there anything I should/could be doing to make more out of my savings?
I'm in a good position to save money - first job out of college, reasonable income, extremely low monthly expenses, no debt. Right now, I'm contributing to my 401k up to the employer match (5%), I have a Roth IRA, and the rest is going blindly into a savings account that's netting me basically nothing in interest.
I have savings/checking accounts at a credit union and a major bank, and the money I'm talking about doesn't need to be liquid.

Is a "high yield" online savings account worth the hassle? What are you doing with your savings?
posted by hot soup to Work & Money (18 answers total) 28 users marked this as a favorite
 
I don't have any real advice (because it seems like you're doing everything right), but remember that if you're not making 3% on your money, it's losing real value. That's the price you pay for liquidity (i.e., for emergency funds and the like), so if you don't need liquidity, don't have it. (I had ING savings for a while. The few days between transfers were a pain, but that was at a time when I was drawing from it more than I should have been.)

That said (and especially in light of lost real value for your savings), a personal financial planner (fee-based, not commission-based) would be a great use of funds. Mutual funds, CDs, stocks (balanced portfolio, unless you like to gamble) are the standard suggestions.
posted by supercres at 2:35 PM on March 5, 2012 [1 favorite]


Your best option may be to push more of your savings into your employer 401k. While you won't realize any additional matching funds, you will realize significant tax relief. Another option would be a Traditional IRA, which depending on your tax situation may be advantageous. This is all assuming that the additional money you are saving is intended for retirement savings.

If the money is intended to be used outside of retirement, your options are different. In this case, you will need to answer questions about what time horizon you are looking at before using the money, what the money will be used for, etc. If you are saving for a down payment on a home, an investment mix including REIT funds might be appropriate. You could put the money into some long term CDs, which might net you a slightly better return (though honestly that much better, and the difference might be almost meaningless for the amount of dollars you are speaking about). You could open up a standard margin account at your favorite online stock broker and start buying funds and stocks if you don’t mind high risk/reward, though if you need the money and are planning on using it in the next few years, that’s probably a poor plan.

Anyway, hope this gives you a good start.
posted by suburbanrobot at 2:36 PM on March 5, 2012 [4 favorites]


I would say that if you're in a position to contribute more to retirement now, then go for it. Remember that compounding interest favors the young. If you contribute more now then you'll have the flexibility to cut back on your contributions if you have more expenses and need to shift funds for a little while (say if you have kids, or want to renovate a house etc).

I'd say put 10% into your 401K and then 10% into your other savings (or 5% into your IRA and 5% into your other savings). That way you're saving 20% of your income which is great.

As far as general finance goals I echo what a lot of the personal finance blog-o-sphere has to say. $1000 in an emergency fund (car breaks down, cat needs a leg cast, whatever) and 6-8 months of expenses in case you get laid off. I also refer to those 6-8 months of liquid expenses as a f*ck-you-fund. It enables you to quit a job if it is truly making you miserable. Sometimes just knowing that you could quit is enough to help you keep your sanity while you job hunt (I speak from experience). Once you build those two savings blocs up you can either shift to contributing more to your IRA, save up for a round-the-world trip, an underwater basket-weaving class, whatever.

It sounds like you're in good shape though, so hooray for that! Pat yourself on the back.
posted by blue_bicycle at 3:02 PM on March 5, 2012


There's nothing magical about personal financial planners, and with very rare exceptions, they do nothing (other than charge you money) that you can't figure out after reading half a dozen books.

Basically, the system is currently hosing conservative investors, and trying to force them to take risks they don't want to take.

You are so very much on the right track. Read books and non-scammy forums (I like crawlingroad.com and bogleheads.org); take your time.
posted by Lizzle at 3:05 PM on March 5, 2012


Oh, and as for what we do with our money --neither Mr. Bicycle or I have 401Ks through work, so we use my income to fully fund Roth IRAs for both of us. We are fortunate to have no debt and use ING. Initially we used ING for its "high interest" but that's no longer a factor since no one offers high interest anymore. We stick with ING because we really like it. Their online banking interface is great and I really like being able to have targeted savings accounts. In addition to our emergency fund and f*you fund we also have (among other things) a savings account specifically for travel, and one that we contribute small amounts to year-round for holiday-season gift-giving. There are lots of ING ATMs around here so that's not been an issue for us. Depositing checks is mildly annoying (you have to mail them in, but they say they're changing that soon) but not annoying enough to make us switch.
posted by blue_bicycle at 3:06 PM on March 5, 2012


Put more in your 401(k), max it out at the IRS limit. You get a same-year gain that's like the world's most fabulous interest-bearing account.
posted by zippy at 3:18 PM on March 5, 2012 [1 favorite]


Is a "high yield" online savings account worth the hassle? What are you doing with your savings?

High yield savings accounts are pretty much returning nothing just like regular savings accounts these days. Rewards checking accounts can give you relatively decent returns, especially if they amount you have in savings is not over the maximum they allow. Generally for a rewards checking account you would have to set up direct deposit into that account and do a certain number of debit card transactions through it.

In general though keeping your money in cash doesn't earn you a lot. Even when rates are better, at best you can count on just barely beating inflation. If you feel like it's a waste to keep a lot of money you don't need right now in cash, you can definitely ramp up your retirement savings to a higher level right now and possibly scale it back some if interest rates get better in the future. On the other hand if you have major expenses ahead that you want to plan for (such as buying a house) you may just want to keep dumping your money into your savings and just think of it as storing your money until you need it rather than as an investment that will make you more money in the long run.
posted by burnmp3s at 3:21 PM on March 5, 2012


I am no expert, but you asked what others are doing with savings. I have ING, originally for the good interest rates and the inconvenient access to the money helped me not spend it. Now it's just the second reason.

Some of my savings I invest, as in buy low, sell high. It's a lot more trouble than expecting a bank to deposit money in your account monthly, but I don't have to be great at it in order to do better than the bank (if I can net a few percent between my bad choices and my good choices, and hold long enough to avoid short term capital gains, then that's definitely better than 0.5% or 0.8%). Granted, it was very easy recently because everything went real low, so I just had to pick something I was pretty sure wouldn't stay low. And also, my effective rate is the weighted average of the ING savings and investment savings.

Also consider other kinds of investments (your own education or certifications, rental property, side business, whatever).
posted by forthright at 3:23 PM on March 5, 2012


The answer to your question depends on the reason you're putting extra money "blindly" into savings. If this money represents your emergency fund or if you are planning on using it for something like a house, going back to school, or something else in the next five years, your options are different than this money is just literally "extra."

If the money is "extra," the obvious answer is to put it into your 401(k). You can stash up to $17,000 in there. That money will grow tax-deferred, which is a huge advantage in addition to the benefit you'll realize now by reducing your taxable income.

If you anticipate having a shorter-term use for this money, then the answer is to put it in a CD or laddered series of CDs, which will earn slightly more interest than your savings account but will preserve the principal in the short term.
posted by MoonOrb at 3:24 PM on March 5, 2012 [1 favorite]


IANAFP. IANYFP.

There is no high-yield savings account right now that can match what the stock market and an index fund will give you these days.

Keep in the account what you need to live/pay rent/have a decent standard of living for four to six months, plus a couple grand beyond that for emergencies like car repairs and/or COBRA health care in case you get laid off because that shit is expensive.

Use the rest to max out your Roth IRA and your 401(k)* for 2012 above and beyond the matching -- true, there isn't matching for those, but Roth IRA's appreciate tax-free, so any appreciation when you cash out** is free money. For 401(k)'s, you do pay tax when you withdraw, but your effective tax rate right now is likely higher than what it will be when you're retired. The difference in that is free money.


* If you think you might need the cash in the next few years, I'd prioritize the Roth. See ** below for why. Personally, though, I cut back on my standard of living in order to max these both out . See FREE MONEY for why.

** You can always take out a dollar that you put in, but you'll pay tax on appreciation if you withdraw it for a reason that isn't on the Government Approved, We Like It When You Do This list, like a first-time buyer buying a principal residence.
posted by joyceanmachine at 3:27 PM on March 5, 2012 [2 favorites]


I use 'high yield' checking accounts (Fatwallet has plenty of information.)

I get 2x the interest (2.5%) than anything else (though only on a portion of the funds), but I have minimum of debit card transactions and direct deposit requirements. The biggest bonus really is the ATM charge refunds. I can use it and get up to $20 back a month on these charges. Since I'm in about 5 different cities a month, it's handy to get out drinking money.
posted by sandmanwv at 3:49 PM on March 5, 2012


If the extra money going into your savings account is meant for medium-term goals (longer than 1 year, shorter than retirement), I would recommend Series I Savings Bonds from the US Government. These bonds pay a fixed interest rate (unfortunately at 0% right now) plus the rate of inflation (probably 2-3% for the foreseeable future). So enough to beat all but the best high yield online accounts. You can't redeem them for 1 year but after that you can get your money back if other options like savings accounts go back to paying higher rates. Basically you are getting free protection from inflation.
posted by Durin's Bane at 4:33 PM on March 5, 2012 [6 favorites]


Ultimately, you need to decide whether you really want to save (i.e. no potential loss of principal) or whether some investing, with a risk of loss, is appropriate.

"You could open up a standard margin account at your favorite online stock broker and start buying funds and stocks if you don’t mind high risk/reward, though if you need the money and are planning on using it in the next few years, that’s probably a poor plan."

Many would argue that the OP is in an ideal situation to assume more risk and use money that is not needed for a long time, but isn't desired to be put into retirement funds, to have a more aggressive portfolio. One might also consider a nice small mix of a minimum of 5 or more appropriate index funds, individual stocks and maybe something like a bond fund to be a little more conservative while still probably having an expected value of appreciation far greater than insured accounts. However, you have to watch out for commissions eating into your returns for smaller portfolios.
posted by iknowizbirfmark at 5:14 PM on March 5, 2012


Thanks all, lots to chew on here.
FYI - I'm not sure about timelines (retirement vs back-to-school vs real estate), so all of these opinions are very helpful. I'll probably look at some combination of increasing retirement contributions and putting together a portfolio.

Secondary question that I forgot to ask (if anybody is still reading) regarding retirement contributions - I recently realized that I have the option for a Roth 401(k).
Past the employer match to the 401(k), should I be contributing to the Roth 401(k) or to the 401(k)?

If I understand this correctly, the advantages of the 401(k):
- Tax deferral on contributions and gains
- Reduction in yearly taxed income

The Roth 401(k):
- If I'm taxed at a higher rate in retirement, lower tax rate on contributions
- Real value of post-tax contributions is higher, gains are tax-free

One question I've always had - how do I realistically determine the probability that I'll be in a higher tax bracket in 35-40+ years?

Thanks! (Best answer marks coming soon, promise)
posted by hot soup at 6:44 PM on March 5, 2012


Betterment might be worth a peek.
posted by godugu at 6:49 PM on March 5, 2012


Past the employer match to the 401(k), should I be contributing to the Roth 401(k) or to the 401(k)?

One question I've always had - how do I realistically determine the probability that I'll be in a higher tax bracket in 35-40+ years?


I don't think there's a huge advantage to doing either--there are good things about both, and you're ahead in the game as long as you're doing one or the other.

If you can't max out both and have reached your employer's matching amount, standard advice is to put the excess in the Roth because there are some circumstances in which you can withdraw it without penalty. Another good reason to favor a Roth instead of a 401k is because you have a lot more choice as to your investments. Sometimes a 401k plan doesn't have the greatest options, and you end up paying slightly more in fees, or don't get the fund you'd really prefer.

But that advice ignores the present value of the tax deduction the IRA gives you, and I think you can make the case that you can stick more in the 401k than you could in the Roth, since your investment in the IRA will be tax subsidized. So there's that to think on, which is why it's really six and one half dozen the other.

As to your second question, you can't know that you won't be in a higher tax bracket. Conventional wisdom seems to assume your tax bracket will be lower because by the point you're drawing on your retirement funds you won't be earning a salary. But that assumes a LOT about what the tax code will look like in 40 years. Who knows?

One last thought--does your employer offer a Roth 401k? That might be an option for you.
posted by MoonOrb at 6:57 PM on March 5, 2012


Buy share of apple.

Seriously.

Also, I know a lot of people are scared of investing in the stock market, but it's really a good place to pump some money into if you're young (which you are) because you can afford to make riskier financial choices without ruining your life.

I'm also straight out of college, no debt, and have 80% of my funds tied to the stock market. Let's just say that I've done fairly well for myself in the stock market and it's not necessarily because I'm lucky, or because I'm an expert stock picker.. it's because equities are CHEAP right now and they can only go up in the long term.

You've kind of missed the train by a little bit since the stock market has rebounded tremendously since August 2011. But still, equities are grossly undervalued right now. Even Warren Buffet thinks so and that dude's fucking rich.
posted by 6spd at 7:34 PM on March 5, 2012


I'm in a similar situation to you (no debt, good income, just a few years out of college). Here's what I do, with the caveat that I don't really know what I'm doing anymore than you do.

I contribute enough to my 403(b) to receive the full match from my employer: 12% contributed by me, which results in nearly 10% contributed by them. I do not currently max it out all the way up to the $17k limit. Everything goes into a target-date fund.

I max out a Roth IRA, also invested in a target-date fund.

I have a reward checking account that is currently paying 2.25% (started out at 4.5% back in 2009 and has been steadily decreasing every few months, unfortunately). I make the bare minimum number of debit card transactions and a small ACH deposit each month to qualify.

I recently purchased a few thousand dollars worth of Series I savings bonds. They are currently earning 3.06%, although I can't redeem them for a year, and if I redeem them before 5 years I will lose three months' interest. The interest rate changes every 6 months and could go up or down. I purchased them in $1000 increments so I can redeem some without having to redeem all of them, if needed.

The rest goes into a "high yield" savings account that is currently earning 0.70%.

Oh, and I own two shares of Apple. I have been slow to wade into investing outside of my retirement accounts, but am considering more of that as my next step.
posted by Nothlit at 8:06 PM on March 5, 2012


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