Savings entries
When is a CD not a CD? When it’s a savings account in disguise.
Traditionally, certificates of deposit have offered a trade-off: in return for the bank’s guarantee of a fixed interest rate, you promise to leave your money with the bank for a specific term. If you renege and withdraw your funds early, you pay the bank a fee equivalent to some portion of the interest you would have earned. In some cases this can result in a net loss: take the case of a six-month CD with a three-month interest penalty; if you withdraw your money after just one or two months, you’ll have less than you started with.
Ally Bank, which up until last month was GMAC, offers a ‘no-penalty’ 9-month CD. Just like any other CD, it has a guaranteed interest yield. Unlike any other CD (or, um, other common 9-month investments), you pay no penalty for early withdrawal. The result is that it functions almost exactly like a long-term savings account with a nine-month guaranteed interest rate. There are just two minor differences:
- you cannot withdraw your money within the first six days after opening the account, and
- you cannot withdraw only part of the CD amount; rather it must be treated as a lump sum.
I spent a fair bit of time looking for the catch here, and couldn’t find one. This appears to be a genuine no-lose situation for customers. If interest rates continue to decline, you’ve got yours locked in. If they rise, you just take your money out and put it somewhere else — even another no-penalty CD. Ally compounds interest daily, so you will always receive the full amount earned through the date of your withdrawal.
The current rate on this 9-month CD is 2.30% APY. I checked Bankrate to compare against all savings account rates as well as CD rates for terms up through one year; the only current product that beats the no-penalty CD is Ally’s own one-year traditional CD, at 2.35%.
Ally’s current Bankrate rating is 3 stars, or ‘performing’, with a predictive indicator to ‘improve’. (I note that no banks currently have a 5-star rating, the highest right now is 4, ‘strong’.) Despite pressure from the FDIC to lower their rates, Ally still consistently appears in the top five spots on Bankrate for both savings accounts and short-term CDs.
I opened my first savings account with them in May of last year, when they were still GMAC, due to their top rates. I also took out a 6-month CD with them this winter.
One of the reasons I’ve shied away from CDs in the past is the hoops that some banks make you jump through to stop the balance from rolling over into a new CD when your current one matures — often written notice is required. Ally executes these instructions easily over the phone. (I happened to call about my CD on the first day after the name change, which had to be a time of maximum stress for their customer service people, yet the fellow I spoke to was both friendly and efficient.)
I have in fact thus far had impeccable customer service from GMAC/Ally at every turn. Their web site is easy to use. Phone support is now available 24/7 and seems to be US-based. Their new branding campaign suggests they’re aiming for the same niche in which ING Direct operates, but with consistently better interest rates than ING offers. The good customer service gives me hope that it’s not merely a marketing ploy, but an actual commitment to customer experience.
(Photo by bettina n.)
Yesterday I promised to give an update on our personal financial situation and how it’s changed over the last half-year.
In November I wrote that we were down to a quarter of our prior income, as Jak’s employer had cut his hours by half just as I’d been summarily dismissed from my full-time job.
I am happy to report that this situation didn’t last long. After just a few weeks Jak was able to ramp back up to 30 hours, and eventually took over a project for a coworker on maternity leave that brought him back to 40 per week. On the down side, Microsoft cut their vendors’ rates by 10% across the board, so Jak got an anti-raise. (What is that, a ‘fall’?)
For my part, I put together a portfolio and spent several months applying for jobs. After the first few weeks, during which I covered the existing backlog, it became apparent that there were hardly any full-time salaried positions available in my field, for people of my skill level. I kept seeing the same dozen or so postings over and over again, and couldn’t break through on any of them.
I had a little more luck on the freelance side. The first big project I got was both exciting and potentially lucrative. Sadly it fizzled very early due to an unexpected change in the client’s circumstance — but at least they did pay me for the work I’d done so far. Then in February I answered a craigslist ad and landed another gig. The down side is a lower hourly rate than I’m accustomed to for freelance, but on the other hand it’s been steady at around 20 hours a week for four months now, and the client pays promptly.
The end of 2008 was cushioned by vacation payout from my ex-job, which carried us through November. December was bleak. But since the first of the year I’d estimate we’re pulling perhaps 60-65% of mid-2008 net income, which is a lot better than the 25% we feared. (Part of this is because I’ve dropped an entire tax bracket, so that even though my gross is much lower and I owe self-employment tax, my net income has fallen less than you might expect.)
On the spending side, we made some large changes. All major house-improvement projects came to a sudden standstill. Vacation plans for 2009 were abandoned. We slashed our Christmas and birthday gift spending to the bone.
Then we pared back the smaller, frequent things. As luxuries go, my biggest weakness has always been restaurant food (and drinks), which typically cost $80-100 per dinner for the pair of us. We cut that indulgence to 1-2 times per month, down from around twice a week while we were both working. I also severely reduced our alcohol purchase and consumption at home. We agreed not to buy any books, music, or movies, making do with the public library and Netflix. Clothes purchases are limited to absolute essentials (mainly replacement underwear).
We’ve had some windfall income from non-work sources. Between the two of us, we received $4800 in federal tax refunds — possibly the only perk to having a lower-than-expected income for 2008. I also sold some reprint rights to my “How to Toilet Train Your Cat” article for an extra $1700. And finally, we’ve gotten a few hundred dollars from online advertising and interest on our savings.
I’ve been able to sock away all of those windfalls, and a bit more besides. Altogether, over seven months, I’ve managed to grow our savings from $30K to $40K, despite our slashed income. In addition, I put an extra $2K this month toward the principal on our second mortgage.
The two mortgages are our only debt, but they’re still crushingly huge. I’ll talk more about that in another post. Otherwise we’re doing quite well, considering. I’m proud of our restraint — I think we’ve done a great job of ‘tightening our belts’ without overreacting and denying ourselves absolutely everything. Swing that pendulum too far and you grow bitter and depressed.
I have no idea how much longer this economic trough will last, but if this is as bad as it gets for us personally I will be ecstatic. Onward!
(Photo by alancleaver_2000.)
I’ve been quiet for a while, going through a number of struggles that have left me without the — in the vernacular of my childhood, the ‘gumption’ — to keep writing frequently. I’m trying really hard to get the spark back now, because I know in the long run the Pocketmint project is important to me.
Here’s a little of what we’ve been dealing with: about three weeks ago, the big corporate monster suddenly chewed me up and unceremoniously spat me out. By innocently mentioning what I thought was a widely obvious event, I apparently violated some unknown policy of the parent company (the details of which remain vague to this day) and in under 24 hours received my walking papers — no mercy, no appeal.
This abruptly cut our income by half. Then, last week, Jak learned that due to staffing cutbacks at Microsoft his hours will be cut to half-time. This means one-quarter income, and total loss of health insurance.
The bad news is that the mortgage alone on our house come to slightly more than Jak’s remaining half-salary, so we’re behind before we even start. The good news is that the mortgage is the only debt we’re carrying — we paid off the last of our massive credit-card debt a couple years ago — and we have a pretty decent cash emergency fund. I’ve been putting aside at least 40% of our take-home for the last two years; some of that we’ve pulled out again for major house improvements and additional (Roth) retirement funding, but we’ve got almost $30k in cash savings.
We can put off all the remaining house projects and hunker down to the bare essentials, and make it for maybe 6-8 months like this. Hopefully it won’t come to that; salaried jobs may be rare right now but I should be able to pick up some freelance or contract work. And Jak’s employer will be working on his behalf to try and increase his hours again. Right now he’s burning PTO to keep the insurance going through December. We’re trying to make this work, and hopefully something will get better before it all gets a lot worse, but we’re definitely in a new era now.
We had a talk with the kids last night, resetting their expectations about our way of life — we won’t be going out for sushi anytime soon, or ordering pizza; we won’t be funding any more weekend out-of-town trips for Michaela to watch her school athletic teams. They took it pretty well; Claire immediately wanted to know how we could cut our costs. Someone else must have previously explained to her about the connection between lighting and your electricity bill, because Claire instantly morphed into Lightswitch Nazi, turning off every light in the house that wasn’t immediately necessary, scolding all the while. We were amused.
I also made the point, which I hope Michaela at least will remember, that this is exactly why it’s important to save a lot of what you earn for a real emergency. She tends to spend money as fast as she gets it, which concerns me in someone about to turn sixteen. But only the difference between us and all those people with ‘foreclosed’ signs on their houses is going to be our empty credit cards and our emergency savings account.
If you have a job now and aren’t saving most of your money for emergencies, please start. You may think this is an isolated incident, but I fear it’s not; if the collapsing economy hasn’t touched you yet, it will. Be prepared.
(Photo by sunchild_dd.)
Sorry for the recent silence; I’ve been having a rough couple of weeks on the Life front. No financial crises, though, at least not yet! Thanks for all the recent comments — it cheers me up to see so many people reading.
This week got off to an interesting start for us with the early-buzzard circling of Washington Mutual. WaMu has been my primary bank for over a decade, and currently holds all of our liquid assets — currently around $30,000 in checking and savings.
Now, all of that money is covered by FDIC insurance, so I’m not worried about a possible bank failure costing me money in the long run. But what about the short run?
Marc Hedlund posted to the Wesabe blog Wheaties for Your Wallet yesterday with an explanation for “What happens to your money if your bank closes?”. Most of it is based on the experiences of one NetBank customer who reported a delay of two to three weeks before he had access to his money after the FDIC shut NetBank down.
This was … alarming, in our circumstance. But it didn’t match what I remembered hearing from my friend Stacy, also a NetBank checking customer when it folded. To be certain, I phoned her up and grilled her on her post-closure financial access. Here’s what she said:
- She never lost access to her money. Debit cards continued to work uninterrupted for purchases and at ATMs.
- She lost online account access for two days, over the weekend. By Monday morning everything was available online again. In the interim, phone support and balance queries remained functional.
I have no idea why her experience was so different from Wesabe’s informant, but that’s an almost unnoticable blip in service. I’ve been more inconvenienced by Comcast going on the fritz.
So I’m not going to rush off and open up a new non-WaMu checking account for bet-hedging purposes. But I think I will be making one other change …
Yesterday I heard an interview on NPR’s All Things Considered with Hurricane Ike refugees in Houston. I was struck particularly by two things: one, that stores in Houston were running out of food. Wha? I mean, it’s not Manhattan Island here, we’re talking about one of the great highway hubs of the nation, and they can’t truck in nonperishables to restock? And two, that all purchases were cash-only. I couldn’t tell from the report whether this was because of logistical reasons (like power outages) or emotional ones, but it did give me pause. Jak and I typically have no more than $40 cash between us, and often none at all. Seattle is a lot safer than the Gulf Coast, but there’s always the chance of, say, a really big earthquake.
So on the list for this week is pulling about $200 out of our WaMu accounts into a Cash Stash. Our biggest problem then becomes keeping it out of the hands of the teenager, who keeps losing her debit card and thinks that we should be her personal ATM.
(Photo by zephyrbunny.)
J.D. at Get Rich Slowly recently opened up a discussion about chasing interest rates on savings accounts. The range of comments are pretty interesting, but the one recurring theme is that most people are willing to stay with a slightly lower rate as long as they’re happy with the service and convenience.
I guess I fall into the rate chaser category, at least up to a point. But like a lot of GRS commenters, my decisions have at least as much to do with emotions as finances.
I have opened savings accounts at three different banks in search of the best rate; two of them currently sit empty. Right now, having just made the month’s mortgage payment, we have $22K in savings. $15K of that is our minimum ‘emergency fund’, enough to hold us for three months in the unlikely event Jak and I both suddenly lost our jobs. Amounts above that are collected and spent on lump-sum Roth IRA deposits (I’ve done mine for the year but we still need $5K for Jak) and house remodeling projects.
Up until this week, I had about $18K in a Countrywide savings account and the rest at Washington Mutual. WaMu had a lower interest rate, but because our checking account is with Washington Mutual, transfers to savings are instant. I can keep our joint checking account (which earns no interest) at a low balance and move the excess from each paycheck into savings — even if only for a week or three, until the mortgage is due.
I opened the Countrywide account less than four months ago, when my 6-month CD expired and I was looking for a good savings rate. At the time, they were paying 4% APR, noticably higher than almost anyone else. In just three months, that rate had fallen to 3.55%, which was barely above the steady 3.5% being paid by HSBC, who holds my other currently empty savings account.
I had already decided that if Countrywide fell to 3.45%, I would transfer the balance to my existing HSBC account, despite the hassle of figuring out the login info for an account I haven’t used in a year and a half. But this was as much an emotional decision as a financial one — I’ve been feeling a bit disgruntled with Countrywide, and was looking for a reason to put our little sum elsewhere. (Countrywide holds our mortgages, and had rated pretty darn low on my customer service scale even before I opened the Plummeting-Rate Savings Account. I made nine calls — NINE — before someone was finally able to link both of our mortgages to the same online account. Took well over a year.)
If I’d been happy with Countrywide, I wouldn’t have bothered. And I wasn’t unhappy enough with Countrywide to open up a whole new savings account at another bank for the same .05% gain — the activation energy wasn’t there.
All of this was made moot, however, when last week WaMu upped its savings account rate from 3.3% to 3.75%. Interest was about to post to the Countrywide account, so I held it for an extra day to the end of the month, and then boom — over to WaMu. Took me about thirty seconds to make the shift.
Until just now, I hadn’t even bothered to work out the math for what this move is netting us in interest, which I suppose is an indication right there that it’s not all about the numbers. Turns out I’m only making about $3.30 a month extra at those rates (though with the way Countrywide is going, I expect the gap to increase). That’s like … not even a vanilla latte for Jak.
But again, there’s an emotional component. I’ve been a WaMu customer for over a decade now, and they’ve generally been good to me, especially at the local branch level. When we were trying to get paperwork together for home loan qualification two years ago, the manager of one local branch expertly wrangled WaMu Corporate Bureaucracy on our behalf, earning our undying gratitude.
Struggling banks — including Countrywide and WaMu — are tending to top the charts on interest rates, in a presumed effort to draw more customers. Looks to me like they’d do better to offer a merely good rate and spend the difference on improving customer service and experience!
