Savings accounts are dead?

[SallyinChicago]

I was listening to a money manager on the radio and he said do not put your money into savings accounts because they pay less than 1%. So if we want to save money get the highest earnings and keep saving without touching the money except for emergency -- where should we put our money? I don't trust stocks anymore.

[kork13]

I've recently started getting into federal I-bonds. Currently, they're yielding 3.365%. Over the last 5 years, they have averaged 3.95% (although May-Oct 09 they yielded 0%, due to the deflationary environment--average of 4.31% excluding that irregular period).

I like the idea of I-bonds because they're one of the safest things out there, and they're designed to protect your money against inflation while still providing a modest rate of return. The only "downside" is that they're not redeemable for the first year, and they're subject to a 3-month interest penalty if redeemed within the first 5 years. HOWEVER, as a regular-contribution, long-term savings solution, I like them. For now, I'm doing $200/mo of them (~10% of my monthly savings).

[poundwise]

You don't have to be a money manager to know that typical bank savings accounts are worthless. This is not a new development as most banks, especially the mega banks, have offered paltry rates for years, some with fees that further reduce the worth of such accounts.

Many of us have turned to online savings options. A couple of years ago, you could get 5% APY on an online savings while big banks like Bank of America and most of your local smaller banks were paying less than 1%. Now, the top end online savings rates have fallen to 2% APY and those other banks typically yield less than a quarter of a percent. Therefore, I would suggest that if you need a simple savings, you would fare much better to seek out an online source. I maintain a list here at SavingAdvice for just such a purpose. Check it out here.

Another option, for even higher rates, is to take advantage of offerings from banks and credit unions that yield higher rates on interest bearing checking accounts. The catch is that these account often come with several stipulations, including requiring Direct Deposit and/or using a debit card a certain number of times per month and/or account minimums, etc. If you can live with those hoops, many of these accounts represent the best level of interest you can get in today's environment. You can search a site called CheckingFinder or check with local banks and credit unions for such offerings in your area.

[disneysteve]

I was listening to a money manager on the radio and he said do not put your money into savings accounts because they pay less than 1%. So if we want to save money get the highest earnings and keep saving without touching the money except for emergency -- where should we put our money? I don't trust stocks anymore.

There are plenty of accounts that currently pay more than 1%. There is a list on the investing forum here.

As for not trusting stocks, that's a whole different issue. Money that you would invest in stocks is not the same money that you would hold in a savings account. The savings account is for funds that need to be liquid for short-term needs and emergencies. The money going into stocks is for long-term goals like college and retirement.

[disneysteve]

The only "downside" is that they're not redeemable for the first year, and they're subject to a 3-month interest penalty if redeemed within the first 5 years.

The 3-month penalty can be cut to a 1-month penalty if you time your purchases and redemptions properly.

I-bonds have an interesting little quirk about them. You get a full month's worth of interest regardless of when in the month you buy or sell the bond. So a bond bought December 1 and a bond bought December 31 both earn the same amount of interest for the month of December. The same is true when redeeming the bond.

If you buy your bond at the end of a month and redeem it at the beginning of a month, you essentially get 2 free months of interest. Thus if you have to redeem during the first 5 years, your interest penalty is really only 1 month, not 3.

[happygirl]

Where do you buy I bonds?

[kork13]

Where do you buy I bonds?

You can do it online, through TreasuryDirect. You need to set up an account with them, which takes at least a week or two because they have to send you a "login card" via USPS. But besides the wait for the card, it's a very simple online application.

The website is largely pretty self-explanatory. My only complaint is that they've gone a little overboard on the security features.... If you press the wrong button, use your browser's "back", let it sit for more than about 3 minutes, or sneeze in the general direction of your computer, it'll log you off....which means you'll have to do their 18.5-step login process again to get back in, which is just infuriating. but I'm just complaining now, so don't mind me...

[Like2Plan]

The 3-month penalty can be cut to a 1-month penalty if you time your purchases and redemptions properly.

I-bonds have an interesting little quirk about them. You get a full month's worth of interest regardless of when in the month you buy or sell the bond. So a bond bought December 1 and a bond bought December 31 both earn the same amount of interest for the month of December. The same is true when redeeming the bond.

If you buy your bond at the end of a month and redeem it at the beginning of a month, you essentially get 2 free months of interest. Thus if you have to redeem during the first 5 years, your interest penalty is really only 1 month, not 3.

DisneySteve,
Let's say you purchased a bond on 31 DEC. Hypothetically*, wouldn't the treasury dept count Dec, Jan and Feb as your 3 month interest penalty? That would bring you up to Mar 1. I can see where you would gain 1 month interest, but I don't follow how you would gain 2. ( I could also see where if you redeemed later on in the month of Mar in this example that you would encroach on your 1 month interest advantage. )

I used to buy (EEbonds) SB through payroll deduction. They had another wrinkle in which you could buy a larger bond over several pays. I don't know if they still do this, but when we bought, they would back date the purchase date to when you had accumulated 1/2 of the purchase price. Say you were buying a 1,000 bond-- they make the issue date of the bond when you had contributed $250.00. You can see how this could work out favorably--especially if you are paid on the last day of the month (on a monthly basis). They take out $250.00 from Dec31st pay and $250.00 from Jan 31st pay and make the issue date on the $1,000 bond for Dec. And this would be on "autopilot"--

* I added "hypothetically" because you can't redeem I bonds for the first 12 months--I couldn't remember if it was 6 months or 12 months, so I looked it up. :
Redeem I Savings Bonds
You can redeem your I Bonds when the bonds are 12-months-old.
You will receive the purchase price of the bond plus any accrued interest.
If you redeem an I Bond before it is 5-years-old, you will lose 3 months of accrued interest.
If you’ve been affected by a disaster, special provisions may apply.
Savings bonds are nontransferable. If you purchase a bond at an auction or find a bond belonging to someone else, you can't redeem it. The registration on the bond is a contractual relationship between the owner and the United States Treasury.

Link to treasury direct FAQ on I bonds

[happygirl]

You can do it online, through TreasuryDirect. You need to set up an account with them, which takes at least a week or two because they have to send you a "login card" via USPS. But besides the wait for the card, it's a very simple online application.

The website is largely pretty self-explanatory. My only complaint is that they've gone a little overboard on the security features.... If you press the wrong button, use your browser's "back", let it sit for more than about 3 minutes, or sneeze in the general direction of your computer, it'll log you off....which means you'll have to do their 18.5-step login process again to get back in, which is just infuriating. but I'm just complaining now, so don't mind me...

Is it possible to purchase them by going to the bank etc? I'm not much of a computer person and would prefer talking to a person face to face. I know, pretty pathetic. Maybe I should make that a new years resolution...

Thanks!

[kork13]

Is it possible to purchase them by going to the bank etc? I'm not much of a computer person and would prefer talking to a person face to face. I know, pretty pathetic. Maybe I should make that a new years resolution...

Thanks!

Absolutely. Most full-service branches of banks/credit unions should be able to sell you savings bonds, or if they can't, point you somewhere that can. I don't know for certain, but I think you're restricted to $100, $500, and $1000 bonds... Also, just be aware that when buying them through a bank, you'll be given paper bonds. As soon as you get them, copy down the bond registration numbers and file them away somewhere. Then put the bonds themselves somewhere safe, because you have to furnish the physical bonds in order to redeem them later. If somehow they are lost/destroyed, I believe that they can be re-issued to you as long as you have the registration numbers for each bond.

[Ima saver]

I was checking out checkfinder.com and found several banks that will give me a higher interest rate on a checking account if I make 10-12 debit transactions per month.
Speaking as a person who has never owned or used a debit card, why do the banks want you to use them so much? Do they make a fee every time you debit your account with your card??
How do debit cards work?

[disneysteve]

DisneySteve,
Let's say you purchased a bond on 31 DEC. Hypothetically*, wouldn't the treasury dept count Dec, Jan and Feb as your 3 month interest penalty? That would bring you up to Mar 1. I can see where you would gain 1 month interest, but I don't follow how you would gain 2.

Buy bond on 12/31/2009.
Redeem bond on 2/1/2011.

You will have owned the bond for 13 months.
You will have earned interest for 15 months.
Pay a penalty of 3 months interest.
That leaves you owning for 13 months and earning for 12 months, thus only a 1 month penalty.

[Like2Plan]

If somehow they are lost/destroyed, I believe that they can be re-issued to you as long as you have the registration numbers for each bond.

Kork,
They can also be re-issued even if you don't have the registration numberrs--it takes a little more time to get them replaced. You file a form with a description of the missing bonds. If you are not sure of the issue date, you can give them a date range and face amount total number of bonds missing, bond number (if known) and inscription.

Here are a couple of the forms:

CLAIM FOR LOST, STOLEN OR DESTROYED
UNITED STATES SAVINGS BONDS

treasury Direct CLAIM FOR UNITED STATES SAVINGS BONDS NOT RECEIVED

We used the one for "bonds not received" when I was auditing our SBs and realized we had a couple missing. They were payroll deductions and we had not received them--so we didn't have the numbers They did make good on them and replaced them. (We converted them to the electronic account after that and it is so much easier to keep track of things. )

[Like2Plan]

Buy bond on 12/31/2009.
Redeem bond on 2/1/2011.

You will have owned the bond for 13 months.
You will have earned interest for 15 months.
Pay a penalty of 3 months interest.
That leaves you owning for 13 months and earning for 12 months, thus only a 1 month penalty.

DisneySteve,
....I believe if you redeemed on Feb1, you would not be getting Feb interest.....
Here is a reference for you:

Department of the
Treasury
Fiscal Service, Bureau of the Public Debt
31 CFR Part 351 - Offering of United States Savings Bonds,
Series EE
Department of the Treasury Circular,
Public Debt Series No. 1-80
As of July 2009
§ 351.35 What do I need to know about
interest rates, penalties, and redemption
values for Series EE
bonds with issue dates of May 1,
2005, or thereafter?

(d) Monthly accruals. Interest accrues
on the first day of each month; that is,
we add the interest earned on a bond
during any given month to its value at
the beginning of the following month.
The accrued interest compounds semiannually.
(e) Interest penalty for Series EE bonds
redeemed less than 5 years after issue
date. If you redeem a bond with an
issue date of May 1, 2005, or thereafter,
less than five years following the issue
date, we reduce the overall earning period
from the issue date by three
months. However, the redemption
value of a bond subject to the 3-month
interest penalty shall not be reduced
below the issue price. This penalty does
not apply to bonds redeemed 5 years or
more after the issue date.

Link to Department of the Treasury Fiscal Service, Bureau of the Public Debt
31 CFR Part 351 - Offering of United States Savings Bonds,
Series EE Department of the Treasury Circular,
Public Debt Series No. 1-80
As of July 2009

[disneysteve]

L2P - I was referring to I bonds, not EE bonds.

"When are earnings added to the I Bond?

I Bonds increase in value on the first day of each month, and interest is compounded semiannually based on each I Bond's issue date. An I Bond's issue date is the month and year in which an I Bond issuing agent receives the full issue price."