Where Would You Park Your Downpayment Savings?
This was the most popular topic suggested this week. “If buying a house is not advisable, then where would you park your savings?”
The first reply. “HSBCDirect at 4.65%, EmigrantDirect at 4.65%, Citibank at 4.75%. Splitting among these 3 you can FDIC insure 300k, 600k if you open them up as joint accounts.”
A followup, “This will only work if FDIC can really cover the defaults, which it may not be able to. 3 month T bills are yielding more than 4.8% at this time so it is hard for me to see why anyone would put their money in a CD with more risk, less liquidity, and less yield.”
Another said, “I think those might be money market rates. Countrywide bank offers 5.41% on 12 month cd right now.”
There was this exchange, “If FDIC doesn’t back the savings, what makes you think T-bills would be any safer?” Answer, “Treasury bills are government debt. The FDIC is a government insurance company. If the government defaults on the debt, all those dollars backed by the FDIC are worthless any way.”
Others discussed liquidity, “‘CASH..’ ‘Ok, but which countries? I am thinking the Yuan.’ ‘But the Yuan is not readily spendable here in the US. By cash, of course, he means, that which can be stuffed in the mattress and used when the virtual money in the banks disappears, a la 1929. If enough banks fail so that the FDIC was swamped (unlikely, I think, but not impossible. The number of bank failures in the early 90s came close, and this could be worse), you want to have something you can actually put your hands on.’”
More replies, “‘Then I would want Loonies!’ ‘And twoonies, canadian dollar has made some serious advance against the dollar in the last year.’”
Others like hard money, “‘Swiss Franc if you are a girly man, Gold if you have a set of nuts, both if you are hermaphrodite.’ But, ‘When the recession comes and people can’t buy so much bling, gold will go down with the rest of the commodities.’ The reply, ‘Not true. Given a choice between a stack of paper or a 100 oz bar of gold which one do you think the car dealer will accept?’”
“‘What car dealer would accept payment in 100 oz bars of gold? The car dealer will accept dollars, the question is whether gold will go up or down in terms of dollars. The spike in gold may have been merely caused by the spike in the money supply brought on by excessive liquididy, in that case, as liquididy slips away, gold prices will fall. Pretty much all assets have risen together; it would not be surprising for them all to drop at the same time.’”
Another said, “‘Gold if you enjoy catching falling knives (which many of those with nuts apparently do…)’”
And finally, “‘T-Bills are better than CDs because there is no state income tax on T-Bills. 3 months and 6 months. If you saw this coming like me in 2001, you would have been primarily investing in Series I Savings Bonds (also not taxed at the state level) and municipal bonds (no state tax, no federal tax).’”
“‘I do gold and platinum too. The key to successful precious metals buying is to be patient, do not be greedy, and buy small quantities regularly, like an ounce or two every 2 months. I even get into treasury notes. You can buy from 2 years to 10 year notes. I’d stay closer to 2 years than 10 years for now. Park 6 months of living expenses in a high yield money market account.”
Thanks to all the readers who contibuted to this topic. I couldn’t possibly have posted all that was written. With rates headed up, this is a timely topic. And having opened a treasury direct account recently, I look forward to tips and strategies!
I just opened up a TD account last week too.
I’m investing the money I just took out of my stock mutual funds into T-Bills. I’m now waiting for the auction process to go through so I can see what rates of return I’m getting for a 3 mo and 6 mo bill. As my CDs for some banks I consider “risky” mature (Countrywide, WaMu and Corus for example) I’ll take those funds and buy T-Bills as well. If a bank looks safe in terms of low MBS holdings I’ll just continue to ladder the CDs at the “safe” banks.
I was told USAA (also for non-civilians) has a money market account, FDIC insured, paying
5.71%
if you open it on the internet. This is the highest that I know.
powayseller, thanks I saw that about USAA for the first time today here on this blog. That’s an excellent rate of return and I am a USAA member as well so that’s something I’ll check on Monday. Good tip!
I just checked, it’s 4.90% for balances over $50k. Where do you see 5.71% ? Even the highest CD rate (7 year term, $175k minimum deposit) is 5.66%.
How does one determine how many MBS holdings a bank has? For instance, my primary bank is Bank of America, where can I determine how invested they are in the crashing RE bubble?
This link is updated after every T-bill auction with the latest rates. There are similar ones for notes and bonds.
http://wwws.publicdebt.treas.gov/AI/OFBills
It is ironic, but the supposedly low-yield I-Bond outperforms everything today (latest nominal yield was above 6%), and is also tax-deferred. The catch is, it has a five-year call penalty.
First, I want to thank Ben for a great Blog and thank you Ben for posting my quotes (last 2 quotes on this topic…hey I’m now famous!). Now about I-bonds. Yes, the yield is very low now. But note the Feds factored in low inflation for the period they used for calculating the variable rate. I think that period is skewed a few months before the May 1 and November 1 new rates. I hope I’m explaining myself well here, but I think the I-bonds this period are a very good deal with a fixed rate of 1.4%. In the previous 6 months before May 1, the fixed rates were only 1%. I want to stress this: The fixed rate is good for 30 years and guaranteed in “faith” by the U.S. government (yeah, you are all laughing, but bear with me, fellow R.E. bears). The variable rate this November will probably be quite a lot higher, noting that the inflation rate is pegged at above 5%. The variable rate part of the I-Bond rates is based on the CPI-U index. Now that rents are supposedly going up, the CPI-U will be higher, hence I think the variable rate will be very high.
My own strategy has been to buy I-bonds monthly. I buy both the electronic version (through treasury Direct) and the paper version of I bonds (through my bank). Moreover, when the fixed rate increases, I increase my monthly investment in I-bonds. When it goes down, I decrease my monthly investment of I-bonds. Over time, my I-bond holdings will be slightly biased toward those with higher fixed rates. Finally, note the long term average annual inflation rate has been 3%. If you bought the I-bonds before May 2002 you would have a slam dunk in I-bonds - with fixed rates of 3% or more.
You cannot sell your I-bond if you bought it only within the last year. If you redeem your I-bond before 5 years, you incur a 3 month interest penalty. Other than that, I bonds are a very good deal. Buy precious metals along with I bonds and you’ll be okay whether we get into very high inflation or a depression.
I bonds are a scam since they are indexed to cooked up CPI numbers that don’t make any sense. When the government gets desperate for funds and raises the “fixed rate” then I might think about them. I bought I bonds in 2002 and regretted getting into it (sold by ‘04).
Treasurydirect.gov is the way to go for short term savings, such as protecting your downpayment fund. The 6 month T-bill is yielding 5.19%. Interest is exempt from State & Local taxes & setting up an accout & buying bonds is commission free.
Also, this is basically as risk free as it gets. The govt. has never defaulted on its debt.
The 1970s were a period when the govt did not default, but it sure printed a lot of paper. The distinction is something like the difference between dying of gunshot wound and dying of cancer.
“The govt. has never defaulted on its debt.”
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As they say in the mutual fund industry, “past performance is not indicative of what will happen in the future.”
Our debt level is astronomical. How can it be repaid? I don’t believe it can be and that there will have to be a default of some type. Bernanke is inflating the dollar but there are limits on how much the foreign creditors will stand. Ultimately, the safest place is gold and silver, IMHO.
A lot of people say that, but name one merchant who’s accepted gold as payment since, oh, 1845. Seriously, if the economy collapses (which will happen is the US gov defaults), will my neighborhood grocer take gold coins? Will his supplier? Will the farmer, who’s growing the crop?
Historically, gold is a terrible investment, just like RE. At least with RE you get a roof over your head. Historically, gold has not even kept up with inflation.
When Bill Gross and Warren Buffet believe the dollar will continue to lose value, why would people continue to put most of their savings in cash?
Executives at top companies that pay frequent dividends are rewarded for increasing shareholders wealth. It would appear that is the safest place to put your money for the long term (10 years or more).
Bill Gross also said, last year, that the Federal Reserve would stop raising rates later in 2005, and would actually start cutting rates by the end of 2005. That guy has made too many wrong calls. I don’t trust him.
I would never put money into a bank. There is simply no reason to do so. T-bills and T-notes through Treasury Direct pay more, no state income tax and are the most liquid financial instrument in the world.
Put some money in Phillip Morris, aka Altria. around 5% dividend yield. People still have to buy food, etc. Thats if you believe all the doom ‘n gloom. Unlike Japan, Banks in the US write off non-performing assets, and the fed and treasury are there to clean up. At the taxpayers (middle-class) expense, of course.
“Put some money in Phillip Morris, aka Altria. around 5% dividend yield. People still have to buy food, etc.”
Good suggestion. Smoking will be a growth industry over the next 15 years for sure.
The risk is not with the individual stock so much as it is with the overall market. It is due for a crash and when it happens, as the traders put it, it is like when the cops raid the whore house…they take all the girls. A crash forces liquidation of all stocks not just the weak sisters. In fact, the best stocks are usually sold first because it is easier to do so. Reflect upon all the mutual funds. When the market goes down, redemptions go up. In order to raise the cash for the redemptions, stocks have to be sold. The more stocks that are sold, the lower the stock prices and that triggers more redemptions. A vicious cycle, IOW.
Stick with gold and silver.
for members of usaa, the money market is 4.81% plus 1% for internet transfer.
that’s 5.81% on your liquid cash, adjustable to FFR
I just switched to that. When I did it, the performance plus index acct was 4.88 and the 1% deal was only for 6 months…
How long is the 1% rate going for you or was it a one time transfer?
6 months. there will be new opportunities by then, i’m sure.
plus you’ve got a rock solid outfit that will survive in hard times.
emigrants rate is on savings accounts, so you have full liquidity, I have money there
One can easily do better than the internet bank yields. My cash is yielding 5.4% tax-equivalent in a muni money market account.
I looked at Fidelity’s money market page and they were paying 4.35 to 5.07%. The lower amount was for treasuries and the higher amount for institutional funds which I don’t think the average person has access to.
I prefer treasuries so that I don’t have to file a state income tax and don’t have to worry about GSE (Fannie, Freddie) paper in the money market account. Or my neighbor’s house. Don’t have to worry about splitting up $100,000 at a time either.
On buying precious metals, you usually get a better deal when you buy in quantity. If you buy 10 Kruggerands, you usually get a savings over 1. And if you buy 100, you get a bigger savings over 10. With silver, you usually get more silver going with 100 ounce bars. You could go with 1,000 ounce bars too but carrying them around could be a bit of a problem. If you want to buy ounces, rounds are usually a better deal than coins though coins may be a little more liquid.
The premium on platinum at coin shops is usually pretty steep.
I think that some mixture of these ideas (metals, foreign currencies, miners if you’re really brave), something like the Central Fund of Canada (silver and gold stock), treasuries.
I drove up to Canada a few years ago to consider opening a savings account and the banks pay far less than the gov interest rate. Australia banks pay a better rate.
Central Banks want you to spend your money (debt) and make it tough to save.
I opened an account in Europe. The bank rates are reasonable, privacy laws are much more restrictive and you can switch between any currency you like with decent exchange rates. Furthermore, if you want to speculate on currencies (which I don’t btw), you can purchase carry trade products where you borrow in one currency and invest in another. Try doing that at a USA bank.
How did you execute this?
Yes, how exactly? Please, do tell.
Someone said “gold was useless in Argentina when the currency crashed.”
Uh, that was the whole point of gold, don’t cha think? If you had gold and silver, you still had something of stable value! If you kept your pesos, you got screwed.
What are the risks of diversified bond funds like JAFIX aside from interest rate increases driving down principal? Is there any chance funds like these will be affected strongly by a downturn in housing, say through too much use of mortgage backed securities?
5.4% for some us banks. It just seems like savings rates went from nothing to 4% - 5%
http://www.bankrate.com/brm/rate/high_ratehome.asp?web=brm&prodtype=invest&product=15&sort=3
So inflation is running anywhere from 4.2% (per CPI) to 7.25% ( per http://tinyurl.com/h7dmd ). I’ll leave out the higher estimates of real inflation. How is getting a 5% return on your UDS acceptable? How do you justify your trust in the USD?
Not trying to be contrary here, I really want to know how people rationalize holding USD’s.
AZ_Cowboy, it seems like just about any investment is risky at this point which to me explains the volatility in the markets over the past month or so. With the globalization affect where is the ultimate flight to quality for your money. Arguments could logically go either way.
Will the emerging markets and their currency prosper while the American consumer sits on the sidelines over the next few years? Are the other countries economies robust enough to self-sustain? I think our foreign debt says otherwise. If the USD really tanks how does the rest of the world support itself? It really seems like a conundrum.
There is no safe place. I would rather lose 3% a year against inflation in a money market and keep adding to that rather than have some ripoff smart-ass CEO steal my money with a $100 million dollar bonus from a company that lost money last year. The property taxes eat you up on real estate if you own too much. It is all about risk management for me, not trying to chase down the next hot bubble trouble that comes down the pike. But that’s just me. Go ahead and buy emerging markets and hedge funds and derivatives and gold seeking a higher return, I’m sure you can’t lose.
If Citibank, FDIC fails, we are all in a lot of trouble. You might as well buy some assault weapons and barricade your house.
I was thinking the same… is there a scenario where FDIC fails, but the whole U.S. economy isn’t going down in flames? If so, I may be shopping for Treasuries sometime soon.
Treasuries, the next bubble?
…or beer, wheat flour, and assault rifles. No, seriously, this is a real question, I’m curious if someone who knows more than me can pose a scenario where FDIC goes down but the government and our fiscal economy is otherwise stable and it is only an isolated sector of “savings account speculators” that is hurt. Now with the tech boom that has already happened, and with the real estate bubble– well we all envision that but even that will have a ripple effect throughout the economy.
But an FDIC collapse? I’ll be checking back on this thread to see.
This seller is asking “Where do I park my $300,000 loss?”
320 Lupine Way, Short Hills
1) Jun 2005 - Bought for $1,300,000
2) Oct 2005 - Put on market @ $1,295,000 (MLS 2204767)
3) Dec 2005 - Listing withdrawn
4) Mar 2006 - Put on market @ $1,198,500 (MLS 2261656)
5) May 2006 - Price dropped to $999,850
6) Jun 2006 - Under Contract (June 12)
7) Jun 2006 - Closed $999,999 (June 15)
This is a “top town” with top schools, a train that runs right into New York City in 30 minutes, and multi-million dollar homes all over the place.
Oh, that’s in New Jersey, by the way.
Full address:
320 Lupine Way
Short Hills, NJ 07078
CD rates are NEGOTIABLE. Go to bankrate.com and bring your list of the top CD rates to your bank. My bank gave me 5.20 apy on a 6 month certificate and 5.45 apy on a 12 month.
“Closed $999,999 (June 15)”
Whoever bought at this point is the one who will probably really get screwed.
UNITED STATES TREAS BILLS 0.000% 12/21/2006 DT 5.170 12/21/2006 06/19/2006 06/22/2006 06/22/2006 912795YK1
no state income tax and if you wait a few weeks and buy a six month tb interest earned july to december is not taxable for 2006 as it is reported as earned in 2007 which is not payable until 2008!
“no state income tax and if you wait a few weeks and buy a six month tb interest earned july to december is not taxable for 2006 as it is reported as earned in 2007 which is not payable until 2008!”
I kind of understand what you wrote. It would be nice if you could use some basic grammar rules though.
FDIC can’t fail — that’s unpossible.
The whole point of having the FDIC do bank insurance instead of having the bank privately insured is that unlike a private company, the FDIC is allowed to print money if necessary to pay your savings back. That kinda puts a damper on the old run-on-the-bank problem.
The failure of FSLIC offers a hint about what might happen if FDIC “failed”"
http://www.investordictionary.com/definition/fslic.aspx
Remember these are govt insurance corporations, and the govt has the power to tax and to print money.
Sure the govt can print up all the money it wants to cover the FDIC insurance, but what effect are all those freshly printed (or electronically created) dollars going to have on your original balance?
Very little effect if the bank has assets (as it is supposed to) that can be liquidated to pay back the savings. Yeah, some of the asset classes could drop substantially as they are liquidated and cause an actual loss to be covered via inflation.
Bank runs used to be a problem because the bank couldn’t immediately convert asserts to cash.
The FDIC is not allowed to print money. If the insurance fund runs dry, it is up to Congress to borrow the money necessary to cover the loss. In effect, the loss is transferred to the taxpayers who don’t have enough savings to receive a benefit.
I’m sure the firehoses will be running overtime on Fannie Mae, FDIC, pensions, and more. But they can’t save it all.
Question about the FDIC, does the government have any legal obligation to bail it out or back its liabilities or is it like an insurance company for banks thats just operated by the government?
From http://www.fdic.gov/about/learn/symbol/index.html:
The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. With an insurance fund totaling more than $49 billion, the FDIC insures more than $3 trillion of deposits in U.S. banks and thrifts – deposits in virtually every bank and thrift in the country.
USD & UST will probably be the best investments… right up until the point they aren’t (ala tech stocks in 2000).
Safest bet is probably to diversify… USD in safe banks, short-term Treasuries, energy stocks, PMs and selected foreign currencies… and then be ready to move quickly.
Physical gold and silver is a hassle to deal with. Gold stocks, on the other hand, have increased my downpayment savings roughly 100% in the past 18 months. It’s not low-risk, and you have to know what you’re buying. AND have to put up with 40% corrections, like the one we just went through.
But it has all worked for me.
can anyone comment on my strategy? I have parked $440K in a Korean bank with a branch here in LA. I have verified that it is f.d.I.c. insured. It also has a five star rating in terms of stabality. It pays 5.5% interest currently and will probably go up at the end of the month. It also allows you to write three checks a month with no penality. I thought it sounds like a good deal. but I do have concerns about it being a foreign bank. But its ratings and insurance is what I am relying on. any comments?
“can anyone comment on my strategy? I have parked $440K in a Korean bank with a branch here in LA. I have verified that it is f.d.I.c. insured. It also has a five star rating in terms of stabality. It pays 5.5% interest currently and will probably go up at the end of the month. It also allows you to write three checks a month with no penality. I thought it sounds like a good deal. but I do have concerns about it being a foreign bank. But its ratings and insurance is what I am relying on. any comments? ”
If it’s FDIC insured then its assets are in US dollars. If you have any concern with currency fluctuations on Korean currency versus U.S currency, I think there is nothing to be afraid of since its deposits seem to be all in the Dollar. On the surface it seems like a sweet deal. I don’t know enough, however, to go below the surface
I am curious (well, maybe “suspicious” is a better word to use) as to who gave that bank a “five star rating” in terms of stability.
Everyone should check all the fine print on the exotic banks prospectuses or filings with the U.S. government.
Vanguard’s Prime Money Market account pays 4.8% and has a 0.3% expense, giving its return a 4.5%. So you would stand to earn $4400 less with Vanguard than with the Korean bank. From here, it is up to you to determine if any risk (if it exists) is worth the extra $4400 gain.
Well one thing that hit me right away is that if your $$$$ in the Korean bank is FDIC insured, it’s only insured up to the first $100,000, which means the other $ 340,000 you have in that bank is hanging bare-ass naked in the wind. Personally, if I had a bundle of dollars that size to protect, I would take $340,000 out and park it in 4 other banks, up to $ 100,000 each. I’d rather sacrifice a little in interest than risk losing my $340,000. But, greed makes people do stupid things.
Good point about the max $100k. I’m wondering why anyone would have more than 6 months living expenses in money market funds when they could have the same liquidity of money market funds in Series I bonds after holding them a year. You can buy up to $30,000 electronic I bonds and $30,000 paper I bonds per year per individual. So if this investor put $60,000 in Series I bonds every year since 2001, he’d have about $300,000 in them by now, and most of that liquid. Best of bests: No State Tax on interest. Money market funds have state taxes. Okay, sometimes rates of Money markets are higher than Series I bonds, well buy a combination of them and 6 month T-bills, which do not have a silly $30,000 limit and you got it made.
Http://www.TreasuryDirect.gov
the US gov’t defuaulted in 1971…
Thanks for the comment, Bill in phoenix. When I called the Fdic. to verify their insurance,they gave me the name of a company that rates banks. So I called them and they said they had a five star rating. The bank is called Shin Han Bank. I also found out through the fdic. that the insurance is 100k for every member of your immediate family. I have a wife and two kids, so I am covered for 400k. I think I’ll be spliting the amount into two accounts soon so my 40k will be covered
to waiting in La…
I am glad you did your homework. I was thinking about my replies for awhile and came up with something for you (and all other interested readers) to ponder: California has one of the highest state income taxes. Your 5.5% yield will generate approximately $24,200 at the end of 12 months and slightly more (given the same rate) at the end of another 12 months. Let’s say you have the cash in for two years. It’s safe to say you have a $50,000 gain in 2 years. that is taxable by the state of California. If you put $440,000 in T-bills at 5.2%, you won’t be subject to the California state tax. You all should consider that you may end up parking your money in a money market fund for several years if the economy is really bad. You will be paying taxes on taxes on taxes at the state level if you do so. See, you get a state taxable yield every year with MM’s, but not with US bonds. It’s even better with municipal bonds - no federal tax, as well. However if you anticipate getting quickly into the market and assume the Dow Jones drops to 5,000 then I can see why you would want to be very liquid. That way you can jump in, just like you could have on September 17 2001 or in February of 2003.
You have to pay state tax on municipal bonds, but no Federal tax, and you have to pay Federal tax, but no state tax, on Federal bills, notes, and bonds.
Kim, that’s incorrect. You pay no state or federal income tax on state-designated municipal bonds or muni money market accounts if you are a resident of that state.
Waiting in LA, you only have insurance for your full amount if you set up each bank account in a different owner’s name [ie only your wife's name, only each child's name, etc.... Do you trust them? :)] . Right now, your account is only insured to $100,000. Joint accounts will not increase your insurance limit. The bank will add up all accounts (individual and/or joint) in which your name is listed as an owner, and any amount over $100,000 will be left uninsured. Check for yourself at the FDIC website. I have a similar problem, and have deposited the maximal insured amount amongst several different banks, and the other half of my cash is in treasuries and munis.
Bill in Phoenix, no one in their right mind would buy I-bonds at the current fixed rate.
“Bill in Phoenix, no one in their right mind would buy I-bonds at the current fixed rate.”
Well then, I’m not in my right mind. But seriously, you would not be saying that if we were to go into a 10 year deflation scenario. 10 year notes would certainly be better than I-bonds in that situation. I disagree with the poster much earlier who said I-bonds are a scam. 1.4% fixed is fixed for 30 years. The variable rate, like I calmly posted earlier, will probably be much higher in November. I like my investing approach. I don’t have more than 9% of my portfolio in I bonds, nor do I have more than 10% of my portfolio in precious metals. I can post my asset allocation on any message board and I guarantee you that I will get hooted at for each one of my own asset allocations and every individual stock I own by at least someone. So I must be well diversified. LOL.
Do what the smart money has done in the past when deflation was ravaging financial assets (stocks, bonds, real estate, etc.)… do what the US government did between 1929 and 1933 and flee to quality. In those three years US Treasury holdings of treasury debt leaped from 15% to 95% of reserves, and physical gold was confiscated by executive decree. Makes perfect sense if you understand what happens to paper “assets” when excess credit evaporates and ceases to prop up inflated prices.
Treasuries will be the last man standing after marginal home borrowers, weak banks, hedge funds and leveraged stock market players’ debts have been restructured or written off.
Gold will once again prove that of its two natures, its ability to act as money (when unbacked freely created cash/credit/reserves are undesirable for their lack of store-of-value) decouples from its commodity attributes. Consider that the recent speculation run up to $720 and crash to $530 may have been the decoupling process at work.
I liked gold at $700 and I like it better now. When others write it off, buy like a contrarian wise man.
GOLD IS NOT A COMMODITY, GOLD IS MONEY.
The business press loves to clump it with oild and copper but gold is money, it’s more like buying Euros than copper. If the demand for commodities crashes, sure their prices will decline. However when currencies start to teeter, no matter what the demand depletion is, safe havens will be few, and PMs are a distinct class of investments in this regard.
Jim Cramer has some sound advice:
Cramer said homebuilders like KB Homes (KBH:NYSE - commentary - research - Cramer’s Take) are cheap enough that their downside risk is minimal, while the upside is huge. “Any pause from the Fed, and this will be the coiled spring of the market and the stocks will take off,” Cramer said. “I don’t see these companies going down to two times earnings.”
Heck, this might be a better deal than Dick’s Sporting Goods!