Ally Bank? And savings idea...

**MonkeyMama** · 08-11-2010, 06:40 AM

Ally is a good choice. I have had an account with them for a while, and they have had higher rates for a long time (not just short term teaser rates).

My only caveat would be that they used to be GMAC bank, and changed their name to attract more deposits. Trying to separate itself from GM and GMAC financing. FYI if you did not know. They are FDIC insured and seem to be doing better than a lot of banks, though.

**ScrimpAndSave** · 08-11-2010, 07:13 AM

If I am not going to use the money for another 5 years...do you think it is better off invested in ETFs? Like VTI for instance...

**jIM_Ohio** · 08-11-2010, 07:33 AM

SnS-

if the money has a 5 year time horizon (I think 10, you posted 5 above), you may want to look up treasury direct.com and check savings bonds, TIPs or I-bonds in particular.

I have no idea what CDs are paying now (6 month CDs to be exact), but am thinking the CPI adjustment on savings bonds should be better than a 6 month rate on a CD and you are locked into CPI for 10 years and not a CD rate for 6 months- my money would be on the CPI to be better (but check for yourself).

Otherwise, the plan looks sound. In about 10 years you should have the cash, I think ($5000 initial deposit, plus $5000 deposits every 6 months).

**edit to add**
You need to focus on timeline first, then investment second IMO to figure out if VTI is worth the risk.

This is because in about 10 years, straight deposits will get you the 100k you are after (10k per year saved for 10 years, right?). You need to ask yourself this question-

how much risk is it worth (to you) if you had the 100k in 9 years? 8 years?

Is the time more important than the goal, or is being able to pick a set date (like 2020) to get the house important to you?

If you said you were flexible on the date (like 8 or 9 years is good, but if you had to wait 12 years, you would not curse my name), then using VTI in MODERATION would be a good thing.

In this case what I would do is put $10k one year in VTI, then split $5000 the next 3 years into VTI and CDs (so at year 4 its $25,000 in VTI and $15,000 in CDs.
For years 5-6-7 I would time the purchase and sales- by this I mean if VTI value is less than $25,000, I buy up to $25,000 (so if market went down and you had $21,000 in VTI, I would buy $4000 of VTI and put $6000 in a CD); if VTI value was $31,000, I would sell $6000 of VTI and buy $16,000 worth of CDs.

I would be checking VTI value at 4 different times each year (once per quarter) and timing the sales and purchases for years 5-6-7. At those points, VTI would NEVER have more than $25,000 in it (sell anything higher) and you would only buy more VTI if market had gone down, and to that point, you would only buy enough to have a $25k position in VTI.

At year 8 you add up your account values-if you are close to 100k, liquidate and get the house, otherwise purchase only CDs ($10k per year) like you mentioned already.

The biggest issue with VTI is you have a 10 year time horizon- having some of it in equities might get you house in a year, however if market took your $25,000 position and turned it into $12,000 (which can happen), your risk is that you need to save one more year to recover the $12k loss in the market.

The flip side to that is your $25k invested could very well double to $50k over years 4-5-6, which means at year 6 you get the house and not year 10. If any single year has a 40% return (a really good year) it will shave close to 2 years off the 10 year plan to get the house (my math was $25k getting a 40% return followed by 15% followed by 10% returns). It is a form of gambling in some ways.

Your worst case and best case is $12k in VTI and 100k in CDs in about 12 years.
year 1 $10k invested in VTI; market is flat
year 2 $5k added to VTI, $5k put in CD; market is flat (15k/5k)
year 2 $5k added to VTI, $5k added to CD;market is flat (20k/10k)
year 3 $5k added to VTI, $5k added to CD market drops 50% (12k/15k)
year 4 10k added to VTI; market does not recover (22k/15k)
year 5 3k added to VTI, 7k added to CD, market does not recover (25k/22k)
year 6 10k added to CDs; market does not recover (25k/32k)
year 7 10k added to CDs (25k/42k)
year 8 10k added to CDs (25k/52k)
year 9 10k added to CDs (25k/62k)
year 10 10k added to CDs (25k/72k)- not enough for house, plus any stock sell would be selling for a big loss.
year 11-12 add 20k to CDs (25k-92k)

Your worse case is a down market which does not recover in 10-12 years... so you need to have mindset you will let money sit there and recover, and just direct new money to CDs at some point (around year 5 or 6).

Most 50% drops in the market are recovered within 18-36 months.
Historical Bear Markets – Historical Bear Market Statistics

Frequency Of Bear Markets

Bear markets, defined as a period where the market goes down 20% or more, from peak to trough, happen frequently; in the last 108 years, from 1900 - 2008, 32 times, or about 1 out of every 3 years. The average length of a bear market is 367 days.

The Year After A Bear Market

In the last 75 years (i.e., 1934-2008), as measured by calendar year, the S&P 500 stock index has suffered total return losses of at least 20% in four different years, the most recent was 2008’s 37.0% decline. In the year after the three previous 20%+ tumbles, the index gained an average of +32% (source: BTN Research).

From The Bottom Of The 2002 Bear Market

After the S&P 500 bottomed at 777 on 10/09/02 following a 2 � year bear market, the stock index gained +15.2% (total return) over the subsequent 1-month period (source: BTN Research).

The S&P 500 gained +101% over the subsequent 5-year period, peaking on 10/09/07.

If it were me, I would be doing the 10k per year into CDs and leave the VTI for longer term investments. However if you told me you were also saving for a new car (replacement car), vacation, retirement and similar in a taxable account, my advice changes drastically. I am doing my best to solve the 1 problem you presented, but I know you have other monies doing other things for you... so if you look at big picture, you might find a way to use VTI and have retirement absorb the risk for getting house faster.

**ScrimpAndSave** · 08-11-2010, 08:02 AM

Hi Jim, I am going to put $5,000 now...but I am going to increase my savings as I get raises...so I am hoping to have the $100,000 in a shorter amount of time. Thanks always for giving me such great feedback.

**jIM_Ohio** · 08-11-2010, 08:10 AM

Originally posted by ScrimpAndSave View Post

Hi Jim, I am going to put $5,000 now...but I am going to increase my savings as I get raises...so I am hoping to have the $100,000 in a shorter amount of time. Thanks always for giving me such great feedback.

I'm thinking of opening a 6 month CD and putting $10,000 in it. At the end of every 6 months, I am going to add $5,000 to it and keep doing that every 6 months and reinvest the amount of interest that I gained as well. This will not be my emergency fund...I am keeping my emergency fund in a savings account that I can access at any time.

You get $10,000 worth of raises in one year? Good for you.

If timeframe is 5 years, stay away from stocks (notice how in my longer post I suggested invest in it for about 5 years then STOP buying and let it grow? You have the time for 10 years, not enough time in 5 years... too much risk.

The interest you are earning is negigible to final result (of the 100k you need, my guess is about $95,000 comes from deposits and $5000 comes from CD interest over a 5-10 year period using CDs or bonds.

**dczech09** · 08-11-2010, 10:09 AM

Hey I think you should stick with Jim's advice; focussing on time is very important in this situation. However I would consider looking at other options from VTI and pick the best for you. If you go through Fidelity Investments and open a brokerage account, you could take advantage of their iShare ETFs, which has $0 commissions on them. Performance wise, they are just like anyother ETF around: the longer you hold the money in there, the better. Getting that $0 commission won't reduce market risk, however it will keep your break-even point lower and will ultimately help produce that much more in future gains. Fidelity requires a $2,500 minimum start-up and has 25 differen ETFs in that group to choose from.

Weigh you options, but definitely look at splitting your investments based on the time factor.

**MonkeyMama** · 08-11-2010, 10:41 AM

I agree - stick with cash. Maybe some equities, in moderation. Pretty much agree with everything here.

**kork13** · 08-11-2010, 03:48 PM

Just my 3 cents (I'm a bit long-winded), I went the I-bond route that Jim mentioned. IMO, it's a better way to go than CD's, because it's inflation-protected and insured directly by the government (as opposed to FDIC, which in a pinch could take weeks/months to sort out). Besides, the rate is better. Right now the I-Bond rate is 1.74%, which is (excluding May-Nov '09, where the rate was 0% to reflect deflation) the lowest it's been in over 5 years (that's just how far back I looked at the records for... realistically, probably the lowest it's been in at least over 10 years). That's comparable to Ally's 2-year CD, except that the I-Bonds will adjust every 6 months. The average rate over the last 5 years (including the 0% period) has been 3.82%; excluding, it has been 4.21%. That's far better than any other place I've looked at.

Two main downsides to I-bonds:
-- They must be held for at least 5 years or else you'll lose some of your interest. After 5 years, you can cash them in at any time. To prevent any problems here, I'm breaking up my bond purchases throughout the year, so that they're smaller and more maneuverable if necessary.
-- You can only purchase $5000/year in I-Bonds, so it is only a partial solution. Myself, I'm investing partly in I-Bonds, partly in market bonds, and partly in market stocks. However, I think I'm a little younger than you, and further away from purchasing my (as you put it) "forever home".

My recommendation: You should consider doing part I-Bonds, part CD's, and part whatever else you like -- market bonds, or even market stocks (like the VTI you were discussing). I finally actually grasped this lesson a little while ago regarding my savings/investments... mixing how your money is saved decreases your risk, and also offers you more options.

**iracer7** · 08-12-2010, 10:28 AM

If you go with Ally, go with their 5 year cd. The penalty for withdrawing early is only 60 days interest, and there is no minimum balance so you could open 20 $500 cd's if you wanted to.

Use this formula to get the effective rates.

( (365 days - 60 days) / 365 days ) * 3.15% = 2.63%
(length of cd - penalty for withdrawing early) / length of cd * rate

**Slug** · 08-12-2010, 01:27 PM

Originally posted by iracer7 View Post

If you go with Ally, go with their 5 year cd. The penalty for withdrawing early is only 60 days interest, and there is no minimum balance so you could open 20 $500 cd's if you wanted to.

Use this formula to get the effective rates.

( (365 days - 60 days) / 365 days ) * 3.15% = 2.63%
(length of cd - penalty for withdrawing early) / length of cd * rate

This is excellent advice and what I was going to recommend. For your time horizon, this would be the approach I would go with. Seems counterintuitive to take a penalty, but when you calculate the repurcussions you'll find yourself ahead. Until ALLY changes their penalty, this is a great deal.

**snafu** · 08-14-2010, 07:44 PM

S&S, client reviews of Ally seem quite positive but note GMAC used TARP bailout sums causing financial institutions insurance rates to increase. Canadians are fussed because Ally reports them to the Patriot Act [whatever that means]

As to your longer term plan...I disagree with other posters. I feel there are significant risks in both Bonds and Equities. As interest rates increase, bonds decrease. I hear lots of talk about inflation but I see it at the grocery store, gas station and in my utility bills. If you hold EF money in a true savings a/c you are losing considerable buying power. I suggest you rebalance your EF holdings with the level of risk you anticipate perhaps limiting EF savings a/c to one month's bills. Should you need,you can access remaining EF sums from better instruments in 3 business days.

With an established a relationship with Vanguard, I suggest you look at their Dividend Fund comparing it to Fidelity and another 5 star Dividend Fund. If I were in your position, I would likely rotate deposits between Index, Dividend and the best International Fund I could find. You are free to re-balance your account as you see fit as the equity market recovers.

**jIM_Ohio** · 08-14-2010, 07:51 PM

Originally posted by snafu View Post

S&S, client reviews of Ally seem quite positive but note GMAC used TARP bailout sums causing financial institutions insurance rates to increase. Canadians are fussed because Ally reports them to the Patriot Act [whatever that means]

Patriot act- requires a SS# or tax payer ID to have an account. Means anyone north of the border had their accounts frozen or similar I think.

**snafu** · 08-15-2010, 11:20 AM

jiM...GMAC was a big player north of your border whose holdings were bought/transferred to ResMor so Ally is being promoted with a gigantic [$$$$] campaign. We are very protective of our privacy and find the 'no rules' Patriot Act worrisome. We look at history like McCarthy hearings where broad swaths of people had their reputations crushed without reason...perhaps to build the ego of the notorious McCarthy. Is it merely a matter of time until 'McCarthism' is applied again...we wonder?

Ally Bank? And savings idea...