I've got the zero percent fed funds rate blues
March 21, 2015 10:10 PM   Subscribe

Inflation is ~1.75% and the best savings account I can find is 0.75%, so I'm not even keeping up with inflation. Can I save money in a safe, liquid, way, without accepting a negative real return?

I find it galling to be "earning" an effective -1.0% on my money. Is there a way to do better?

I'm in the US and my savings are in USD. The savings account in question is a "Capital One 360" (formerly ING Direct) savings account.

I'm open to non-FDIC insured instruments, if they are very safe, where "very safe" means "would not lose more than 10%-20% of their value in a crash equivalent to the 2008 crisis."

This is for an emergency fund, so I'd need to be able to liquidate it on short notice. I got burned in the last crisis because I had some money in the stock market (in an index fund) that I thought I wouldn't need to touch for a long time, but it turned out that I needed to, and I had to accept a loss on it. I'd like to avoid being in that situation again.
posted by jcreigh to Work & Money (10 answers total) 25 users marked this as a favorite
If the money's for an emergency fund, just go ahead and leave it in your savings account. That's honestly the only rational approach to take here. Well, you can do a CD ladder or something of the sort, but you need to be very careful and know what the penalties for early withdrawal are. I'm not sure what the best rates on CDs are off the top of my head these days though.

Emergency funds and risk do not mix.
posted by un petit cadeau at 10:20 PM on March 21, 2015 [2 favorites]

Ally pays 2% APY right now on a 5-year CD. I've used it them in the past, and the early withdrawal penalties aren't too bad.
posted by Maxwell's demon at 10:23 PM on March 21, 2015

American Express has a high yield personal savings account with .90% apy. It's not a lot, but it's better than other accounts I've found. No minimum, FDIC insured, easy to transfer out into your checking account.
posted by cecic at 10:28 PM on March 21, 2015

You're looking for I-Series US Savings Bonds (aka I-Bonds). Not to be confused with the more common EE-Series bonds stashed at the bottom of the sock drawers of America, I-Bonds are designed to do exactly what you're looking for - always provide return at or above the rate of inflation with zero risk of loss (in the unlikely event there is deflation, you keep your principal and just aren't paid interest for the deflationary period).

The catches are that you can't purchase more than $10k in I-Bonds each year (although you can get up to $5000 additional by purchasing them directly with your tax refund), and more importantly, you can only begin to cash them in one year after their purchase (they collect interest for up to 30 years). You would want to begin purchasing them over several years so that you can maintain the bulk your low-interest security fund as you get the I-Bonds a point where they vest and you have adequate savings for an emergency.

I find it curious that, during a period where commercial interest rates make it so difficult to save, few people discuss or recommend I-Bonds, even though they're a zero-risk, inflation-hedging gift to small savers from the US government.
posted by eschatfische at 11:04 PM on March 21, 2015 [47 favorites]

Are you maximizing your Roth IRA already? Roth IRA contributions (not earnings) can be withdrawn penalty and tax free at any time, making a Roth a pseudo-emergency fund of sorts that can be invested however you like (albeit one that it should truly be an emergency to tap, and not just an unexpected expense.)
posted by namewithoutwords at 2:10 AM on March 22, 2015 [2 favorites]

FWIW, the annual inflation rate in 2014 was 0.8%, so it isn't as bad as you think. Technically, so far 2015 is in deflation due to oil price declines, although the Fed predicts it will be between 1 and 1.5% on the year.
posted by Lame_username at 6:37 AM on March 22, 2015 [2 favorites]

First off, lets be clear that this is an exercise in rearranging deckchairs on the titanic. Shifting your emergency fund rate a few basis points will net you perhaps 2 dollars a month, for potentially a huge amount of hassle. Now, on to brass tacks:

Nobody's mentioned TIPS yet. If you legitimate, genuine concern is inflation adjusted returns being positive, this is the vehicle for you. They're similar to I-Bonds, but without the feast-or-famine mechanic the annual I-Bond rate changes encourage. The yield is basically X percent +/- inflation as determined by CPI-U.

X percent is determined by an auction. People sign up to loan the government money in the form "I'll lend 10 million dollars at 0.1 percent." The Treasury determines how much they need / want to borrow, sort the lenders by interest rates, and allocate loans to the lowest bidders, at an interest rate equal to the highest winning bid.

The TIPS tab here gives you some recent auction results. You should be a little concerned, however. The winning bids have occasionally been negative. As in, I'll loan you 101 dollars, and you repay me 100 inflation adjusted dollars five years from now. This is partially why your savings account and certificates of deposits are paying crap yields -- no bank* can expect to stay in business giving its customers better deals than it can find in the market.

I think it's reasonable to put together an emergency plan, and ladder your investments. First tally your expenses, and write a concrete action plan you can follow in an emergency to reduce them. Then keep one or two month's expenses in high yield savings, a few month's in CDs with maturities spread across the next year. For the extreme circumstances, a portion of your Roth IRA can be a final backstop, where you take some risk for high returns. The high risk portion is only 20 percent of your fund, you can totally put it low cost in S&P500 index funds and meet your goals. More realistically, a bit less than half in stocks is probably fine, as the severe drops are historically not persistent. If you go above 20 percent, part of your emergency plan might be moving money out of stocks if you lose a job.

*When you realize that Ally bank is formerly GMAC, the contradiction can be resolved: GMAC's parent company went bankrupt, and they are essentially in a home-run-or-strike-out situation. Their stock has declined 10 percent since IPO, because while they borrow at 2% and lend at twice that or more, securitized lending is risky in a way that won't show up on annual reports.
posted by pwnguin at 12:02 PM on March 22, 2015 [2 favorites]

I'm with un petit cadeau; there's not much you can do with emergency money. The whole point is to keep it accessible. And other suggestions have downsides (TIPS are best held in retirement accounts because otherwise you'll owe tax each year on them.)
And yeah, how much more will you really make?
You could inch out into CDs and make a little more if the withdrawal penalties are minor. I know that's true at Ally, for example. I wouldn't try anything more elaborate with emergency money, though.
posted by pmurray63 at 11:01 AM on March 23, 2015

"TIPS are best held in retirement accounts because otherwise you'll owe tax each year on them."

You realize you get a 1099-INT on savings accounts, right?
posted by pwnguin at 5:39 PM on March 23, 2015

Touché. I've always seen the warning, though, maybe because there are typically larger amounts involved.

I still don't think it's worth going beyond a CD (or a ladder of them), though. Short-term bonds might earn a tiny bit more, but then you run the risk of loss.
posted by pmurray63 at 4:54 AM on March 24, 2015

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