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posted: Feb. 27, 2005 @ 9:02a
Article at the New York Times
The Savings Account Is Back. (No Laughing, Please.)
INVESTING
The Savings Account Is Back. (No Laughing, Please.)
By ROBERT D. HERSHEY Jr.
Published: February 27, 2005
AFTER suffering through years of derisively low interest rates, people with cash on their hands may finally be able to get a decent return for parking their money safely in bank accounts or in money market funds.
Such savers may still have a hard time coming out ahead, after taxes and inflation, but the overwhelming consensus is that the rate increases that the Federal Reserve began last June will continue and that such investments will become more attractive. "Cash is king in a rising rate environment," said Peter G. Crane, vice president and managing editor of iMoneyNet in Westborough, Mass. "Money funds and bank deposits are going to be the place to be."
Wise shopping in this marketplace is increasingly important, specialists say, because wide rate disparities have emerged among banks themselves, so it isn't always clear whether a money market fund or a bank is where you should put your money.
Last August, the average money market fund regained its traditional rate advantage over the average bank money market account and three-month certificate of deposit. (On average, the funds now yield 1.88 percent, while the banks, whose accounts are insured by the federal government, pay 0.55 percent.) But recently some Internet banks, which have lower overhead costs than traditional banks, have been raising their savings rates far above the average.
One of the most prominent of these banks, largely because of its heavy broadcast, print and direct-mail promotion, is ING Direct. (Its ubiquitous initials stand for the International Netherlands Group.) Just after Christmas, it offered a rate of 2.35 percent on its federally insured Orange savings account, with no fees or minimums; on Friday it raised that rate to 2.6 percent.
Another of the online offerings is from EmigrantDirect, a division of Emigrant Savings Bank of New York, which also has 36 brick-and-mortar branches. EmigrantDirect's American Dream savings account pays a "variable" 3 percent; the bank guarantees at least that rate for the rest of 2005 and contends that it is the highest nationally advertised annual percentage yield for unrestricted savings accounts paying interest from day of deposit to day of withdrawal.
Internet banks can often link an account to a customer's existing checking account at another bank, making it easy to move money by phone or online.
Of course, when shopping for the best money-market fund or bank rate, be sure to check all the conditions. Western Financial Bank offers an account at 3 percent, though it requires a $5,000 minimum. Capital One has one at 2.65 percent, requiring a $10,000 minimum.
Other rising competitors include MetLife Inc., one of the first insurance giants to acquire a bank. For a $5,000 minimum, MetLife Bank offers 2.50 percent on money market accounts.
It does not claim to pay the most but trades instead on its strong brand name, its legions of agents to whom investors can talk and rates that are consistently competitive.
"Customers look for more than just the rate," said Shailendra Ghorpade, chief executive of the bank. "We don't strive to be the highest. We don't want to offer a rate that is unsustainable, bouncing up and down."
Some institutions offer different rates for different account balances. In newspaper advertisements, M&T Bank of Buffalo offers a "solid" 3 percent interest rate, but the fine print notes that this is only for an account of $10,000 or more for three months. After that, the rate drops to a range of 1 percent to 1.49 percent, depending on the account's size. Accounts are also subject to fees not specified in the ads.
Despite the new challenges from banks, money market mutual funds are making a strong comeback. Their rates have been rising quickly enough that the industry is almost certain to be posting in January and February its first two-month deposit inflow since the end of 2001.
There is little mystery to yields on money funds. To find a rough average, said Mr. Crane of iMoneyNet, just take the Fed's overnight interest-rate target, 2.5 percent since Feb. 2, and subtract a half-percentage point for operational expenses. That current 2 percent yield is four times what investors were earning in mid-2003; he predicted that a 3 percent yield was almost certain by year-end. The rates being offered by money market funds include 2.51 percent for the PayPal money market fund; 2.25 percent for the Vanguard Prime fund and 2.08 percent for Fidelity Cash Reserves. Three Scudder money funds are paying 2.37 percent to 2.46 percent.
Banks, on the other hand, have more rate flexibility than the money market funds, and traditionally have cut their rates quickly when overall interest rates are declining or have raised them slowly when overall rates are climbing. But in the recent down cycle, rates fell so low that some banks didn't want to risk unduly antagonizing customers by cutting rates as much as the market was signaling.
Some money market funds, to keep returns in positive territory, similarly waived some fees when rates were near their ebb, though they have been restoring them more recently. Experts say that consumers who have a money market fund should make sure that an attractive yield doesn't come with unusually high costs. Bank accounts, meanwhile, can require outsize minimum deposits to avoid fees or may charge fees for inactive small accounts.
If you notice that your money account is still earning a fraction of 1 percent, it may be time to look for a better deal or to move the money elsewhere. Beyond money funds or banks, there are other alternatives: tax-exempt money funds, for example, or ultrashort bond funds, which may be only slightly riskier than money funds.
Employer-sponsored 401(k) plans often include stable-value funds, also known as guaranteed interest income funds or capital preservation funds. Investors should also look in the nooks and crannies of their portfolios for ways to enhance returns on their cash.
If you are the beneficiary of an insurance policy, for example, and have left your payout in an account that the insurance company kindly opened for you - instead of cutting you a check - the return may remain meager unless you act.
One recent widower noticed the proceeds of about $64,000 from his wife's federal government life policy resting idly at 1.5 percent even after the Federal Reserve had raised rates six times. After inquiring, he was given a 3 percent rate not available to the general public or even the company's own employees and had to tie up the money only for six months.
OF course, the almost-unanimous view that short-term interest rates are headed higher could be wrong. But that seems unlikely, especially because Alan Greenspan, in his final year as Fed chairman, is presumably unwilling to risk any revival of inflation.
Bankrate.com, a Web site where investors can check all kinds of data on money rates, had this to say in early February, just after the latest quarter-point rate increase by the Federal Reserve:
"The Bankrate mantra remains the same - stick with short-term C.D.'s, one year or less, to get the biggest bang for your investment," it said. "Longer maturities have been a bit erratic, but slowly heading up. It's still not worth locking up money long term at these rates."
Mary Miller, a fixed-income strategist at T. Rowe Price, the investment manager in Baltimore, put it this way in a newsletter: "We expect short-term rates to rise more than long-term rates" this year, adding that "by next summer, we think the federal funds rate could reach 3.5 percent."
Message edited by: FatWallet moderator on 2007-02-26 16:34:09 CST
thanks!
