Savings I Bonds November 2020 Interest Rate: 1.68% Inflation Rate, 0% Fixed

Posted on October 13, 2020 // 4 Comments

Update November 2020. The fixed rate will be 0% for I bonds issued from November 1, 2020 through April 30th, 2021. The variable inflation-indexed rate for this 6-month period will be 1.68% (as was predicted). If you buy a new bond in between November 2020 and April 2021, you’ll get 1.68% for the first 6 months. Don’t forget that the purchase limits are based on calendar year, if you wish to max out for 2020. See you again in mid-April for the next early prediction for May 2021.

Original post:

sb_posterSavings I Bonds are a unique, low-risk investment backed by the US Treasury that pay out a variable interest rate linked to inflation. With a holding period from 12 months to 30 years, you could own them as an alternative to bank certificates of deposit (they are liquid after 12 months) or bonds in your portfolio.

New inflation numbers were just announced at BLS.gov, which allows us to make an early prediction of the November 2020 savings bond rates a couple of weeks before the official announcement on the 1st. This also allows the opportunity to know exactly what a October 2020 savings bond purchase will yield over the next 12 months, instead of just 6 months. You can then compare this against a November 2020 purchase.

New inflation rate prediction. March 2020 CPI-U was 258.115. September 2020 CPI-U was 260.280, for a semi-annual increase of 0.84%. Using the official formula, the variable component of interest rate for the next 6 month cycle will be 1.68%. You add the fixed and variable rates to get the total interest rate. If you have an older savings bond, your fixed rate may be very different than one from recent years.

Tips on purchase and redemption. You can’t redeem until 12 months have gone by, and any redemptions within 5 years incur an interest penalty of the last 3 months of interest. A simple “trick” with I-Bonds is that if you buy at the end of the month, you’ll still get all the interest for the entire month as if you bought it in the beginning of the month. It’s best to give yourself a few business days of buffer time. If you miss the cutoff, your effective purchase date will be bumped into the next month.

Buying in October 2020. If you buy before the end of October, the fixed rate portion of I-Bonds will be 0%. You will be guaranteed a total interest rate of 0.00 + 1.06 = 1.06% for the next 6 months. For the 6 months after that, the total rate will be 0.00 + 1.68 = 1.68%.

Let’s look at a worst-case scenario, where you hold for the minimum of one year and pay the 3-month interest penalty. If you theoretically buy on October 31st, 2020 and sell on October 1, 2021, you’ll earn a ~1.04% annualized return for an 11-month holding period, for which the interest is also exempt from state income taxes. If you theoretically buy on October 31st, 2020 and sell on February 1, 2022, you’ll earn a ~1.10% annualized return for an 15-month holding period. Comparing with the best interest rates as of October 2020, you can see that this is slightly higher than a current top savings account rate or 12-month CD.

Buying in November 2020. If you buy in November 2020, you will get 1.68% plus a newly-set fixed rate for the first 6 months. The new fixed rate is unknown, but is loosely linked to the real yield of short-term TIPS. In the past 6 months, the 5-year TIPS yield has been consistently negative! My confident guess is that it will be zero (0%). Every six months, your rate will adjust to your fixed rate (set at purchase) plus a variable rate based on inflation.

If you have an existing I-Bond, the rates reset every 6 months depending on your purchase month. Your bond rate = your specific fixed rate (set at purchase) + variable rate (total bond rate has a minimum floor of 0%).

Buy now or wait? The fixed rate is most likely going to be zero for October and November purchases, and so I would personally wait until November and get the 1.68% inflation and unknown inflation rate after that, betting that it will be higher than 1.06%. Either way, it seems worthwhile to use up the purchase limit for 2020 as the rates will at least be slightly higher than other cash equivalents.

Unique features. I have a separate post on reasons to own Series I Savings Bonds, including inflation protection, tax deferral, exemption from state income taxes, and educational tax benefits.

Over the years, I have accumulated a nice pile of I-Bonds and now consider it part of the inflation-linked bond allocation inside my long-term investment portfolio.

Annual purchase limits. The annual purchase limit is now $10,000 in online I-bonds per Social Security Number. For a couple, that’s $20,000 per year. Buy online at TreasuryDirect.gov, after making sure you’re okay with their security protocols and user-friendliness. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888. If you have children, you may be able to buy additional savings bonds by using a minor’s Social Security Number.

For more background, see the rest of my posts on savings bonds.

[Image: 1946 Savings Bond poster from US Treasury – source]

Filed Under: Investing, Retirement, Savings Bonds //

Simple Credit Card / Brokerage / Bank Promotion Spreadsheet Template (Google Drive)

Posted on October 7, 2020 // Leave a Comment

gsheetsIf you can’t tell by now, I enjoy participating in various credit card, brokerage, and banking promotions throughout the year. I think of it as a profitable hobby, as I enjoy trying out different financial products in addition to the thousands of dollars in extra income each year. Below is the simple spreadsheet that I use to I track all of the various the requirements and deadline dates involved. I also set online calendar reminders using those dates.

I just moved it over to Google Sheets – the first link will allow you to make your own personal copy to edit as you wish. Please don’t ask for access to the original sheet, as that would mess it up for everyone else.

 

I intentionally keep it rather minimalist. This Reddit template by u/garettg is another example with many more bells and whistles.

See also: MMB Simple Portfolio Rebalancing Spreadsheet Template and How I store my physical credit cards.

Filed Under: Banking, Credit Cards, Deals & Offers, Investing //

Best Interest Rates on Cash – October 2020

Posted on October 5, 2020 // 2 Comments

Here’s my monthly roundup of the best interest rates on cash for October 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 10/4/2020.

High-yield savings accounts
While the huge megabanks pay essentially no interest, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • Affirm has the top rate at the moment at 1.00% APY with no minimum balance requirements. I wonder how long this will last, as the rate is high but Affirm also charges really high interest to let folks buy jeans on a payment plan. There are several other established high-yield savings accounts at a little below 1% APY for now.
  • As noted in my past two monthly updates, I took a gamble and opened an HM Bradley last quarter, shifted over my direct deposit, didn’t withdraw it, and am now earning 3% APY on up to $100,000 of my liquid savings from October through December 2020. My long-term concerns still linger, but I am impressed that they kept their rates high for this quarter. You can still earn 1% for this quarter (and hopefully qualify for the higher tiers next quarter) if you can move over a direct deposit.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 0.75% APY with a $500 minimum deposit. AARP members can get an 8-month CD at 0.85% APY. Ally Bank has a 11-month No Penalty CD at 0.60% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 0.35% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • CommunityWide Federal Credit Union has a 12-month CD at 0.95% APY ($1,000 min). Early withdrawal penalty depends on how early you withdraw. Anyone can join this credit union via partner organization ($5 one-time fee).

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are NOT FDIC-insured and thus come with a possibility of principal loss, but may be a good option if you have idle cash and cheap/free commissions.

  • The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.05%. Vanguard Cash Reserves Federal Money Market Fund (formerly Prime Money Market) currently pays an 0.04% SEC yield.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.70% SEC yield ($3,000 min) and 0.80% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 0.47% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.64% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. Note that there was a sudden, temporary drop in net asset value during the March 2020 market stress.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section isn’t very interesting as T-Bills are yielding close to zero!

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 10/2/2020, a new 4-week T-Bill had the equivalent of 0.10% annualized interest and a 52-week T-Bill had the equivalent of 0.12% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 0.00% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -0.04% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest. The annual purchase limit is $10,000 per Social Security Number, available online at TreasuryDirect.gov. You can also buy an additional $5,000 in paper I bonds using your tax refund with IRS Form 8888.

  • “I Bonds” bought between May 2020 and October 2020 will earn a 1.06% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 2020, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.
  • See note about EE Bonds as a potential long-term bond alternative.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend nor use any of these anymore.

  • One of the few notable cards left in this category is Mango Money at 6% APY on up to $2,500, along with several hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. If you want rates above 2% APY, this is close to the only game in town.

  • Consumers Credit Union Free Rewards Checking (my review) still offers up to 4.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. The Bank of Denver has a Free Kasasa Cash Checking offering 2.50% APY on balances up to $25,000 if you make 12 debit card purchases and at least 1 ACH credit or debit transaction per statement cycle. If you meet those qualifications, you can also link a savings account that pays 1.50% APY on up to $50k. Thanks to reader Bill for the updated info. Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • The Federal Savings Bank has a 5-year promo certificate at 1.50% APY ($10,000 min), 3-year at 1.20% APY, and 18-month at 1.10% APY. The early withdrawal penalty for the 5-year is 12 months of interest.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Vanguard has nothing special right now, I see a 5-year at 0.45% APY right now. Be wary of higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. At this writing, Vanguard has a 10-year at 0.65% APY. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently 0.10%). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. Purchase limit is $10,000 each calendar year for each Social Security Number. As of 10/2/2020, the 20-year Treasury Bond rate was 1.25%.

All rates were checked as of 10/4/2020.

Filed Under: Banking, Deals & Offers, Investing //

Skin in the Game: How Much Do You Have To Lose? (Book Notes)

Posted on September 27, 2020 // Leave a Comment

The central idea behind the book Skin in the Game: Hidden Asymmetries in Daily Life by Nassim Nicholas Taleb is simple. Never trust anyone without skin in the game. In the real world, behavior changes for the better when you have to pay a price for your mistakes. This is a very handy heuristic to apply in everyday life and applies in many areas. A good example of why we shouldn’t allow people to not have skin in the game is Bob Rubin:

The Bob Rubin trade? Robert Rubin, a former Secretary of the United States Treasury, one of those who sign their names on the banknote you just used to pay for coffee, collected more than $120 million in compensation from Citibank in the decade preceding the banking crash of 2008. When the bank, literally insolvent, was rescued by the taxpayer, he didn’t write any check—he invoked uncertainty as an excuse. Heads he wins, tails he shouts “Black Swan.”

If someone is giving you financial advice, don’t worry about what s/he “thinks”, ask them what they actually hold in their own portfolio. Sure, what is optimal for them may be different than what it optimal for your own situation, but at least put it out there and let the consumer decide. Predictions are cheap without real risk of loss/pain.

In case you are giving economic views: Don’t tell me what you “think,” just tell me what’s in your portfolio.

How much you truly “believe” in something can be manifested only through what you are willing to risk for it.

Conflicts of interest can be good, if it means skin in the game. Taleb argues that while many people think it is better for CNBC “experts” and/or journalists to not own the stocks or companies they talk about, it’s actually better that they do.

There are two types of “talking one’s book.” One consists of buying a stock because you like it, then commenting on it (and disclosing such ownership)—the most reliable advocate for a product is its user. Another is buying a stock so you can advertise the qualities of the company, then selling it, benefiting from the trumpeting—this is called market manipulation, and it is certainly a conflict of interest.

We removed the skin in the game of journalists in order to prevent market manipulation, thinking that it would be a net gain to society. The arguments in this book are that the former (market manipulation) and conflicts of interest are more benign than impunity for bad advice. The main reason, we will see, is that in the absence of skin in the game, journalists will imitate, to be safe, the opinion of other journalists, thus creating monoculture and collective mirages.

In general, skin in the game comes with conflict of interest. What I hope this book will do is show that the former is more important than the latter. There is no problem if people have a conflict of interest if it is congruous with downside risk for themselves.

Bureaucracy too often means NO skin in the game. We allow people elected for only a few years be allowed to bind all of us into agreements that last for decades. We should also look more closely at the former “civil servants” that conveniently land high-paying jobs soon after their terms are over.

Bureaucracy is a construction by which a person is conveniently separated from the consequences of his or her actions.

More critically, people with good lawyers can game regulations (or, as we will see, make it known that they hire former regulators, and overpay for them, which signals a prospective bribe to those currently in office). And of course regulations, once in, stay in, and even when they are proven absurd, politicians are afraid of repealing them, under pressure from those benefiting from them. Given that regulations are additive, we soon end up tangled in complicated rules that choke enterprise. They also choke life.

Employees have skin in the game, but perhaps not in a good way.

A company man is someone who feels that he has something huge to lose if he doesn’t behave as a company man—that is, he has skin in the game.

What matters isn’t what a person has or doesn’t have; it is what he or she is afraid of losing. […] The more you have to lose, the more fragile you are.

It is no secret that large corporations prefer people with families; those with downside risk are easier to own, particularly when they are choking under a large mortgage.

People whose survival depends on qualitative “job assessments” by someone of higher rank in an organization cannot be trusted for critical decisions.

How can you achieve true freedom?

Financial independence is another way to solve ethical dilemmas, but such independence is hard to ascertain: many seemingly independent people aren’t particularly so. While, in Aristotle’s days, a person of independent means was free to follow his conscience, this is no longer as common in modern days.

Intellectual and ethical freedom requires the absence of the skin of others in one’s game, which is why the free are so rare. I cannot possibly imagine the activist Ralph Nader, when he was the target of large motor companies, raising a family with 2.2 kids and a dog.

I have held for most of my (sort of) academic career no more than a quarter position. A quarter is enough to have somewhere to go, particularly when it rains in New York, without being emotionally socialized and losing intellectual independence for fear of missing a party or having to eat alone. But one (now “resigned”) department head one day came to me and emitted the warning: “Just as, when a businessman and author you are judged by other businessmen and authors, here as an academic you are judged by other academics. Life is about peer assessment.”

You can define a free person precisely as someone whose fate is not centrally or directly dependent on peer assessment.

Embrace taking some risk (those that don’t endanger your survival). Starting a business is one way.

Yes, take risk, and if you get rich (which is optional), spend your money generously on others. We need people to take (bounded) risks. The entire idea is to move the descendants of Homo sapiens away from the macro, away from abstract universal aims, away from the kind of social engineering that brings tail risks to society.

Doing business will always help (because it brings about economic activity without large-scale risky changes in the economy); institutions (like the aid industry) may help, but they are equally likely to harm (I am being optimistic; I am certain that except for a few most do end up harming). Courage (risk taking) is the highest virtue. We need entrepreneurs.

By definition, what works cannot be irrational; about every single person I know who has chronically failed in business shares that mental block, the failure to realize that if something stupid works (and makes money), it cannot be stupid.

A final summarizing quote:

Recall that skin in the game means that you do not pay attention to what people say, only to what they do, and to how much of their necks they are putting on the line. Let survival work its wonders.

Filed Under: Behavioral Economics, Book Reviews, Entrepreneurial, Investing //

Best Interest Rates on Cash – September 2020

Posted on September 9, 2020 // 8 Comments

Here’s my monthly roundup of the best interest rates on cash for September 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 9/9/2020.

High-yield savings accounts
While the huge megabanks still pay nearly zero, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • Affirm has the top rate at the moment at 1.00% APY with no minimum balance requirements. I wonder how long this will last, as the rate is high but Affirm also charges really high interest to let folks buy jeans on a payment plan. There are several other established high-yield savings accounts at a little below 1% APY for now.
  • If you want some upside potential, HM Bradley is still advertising a 3% APY top rate for those that spent the previous quarter saving at least 20% of your direct deposit. It’s likely to drop next quarter starting 10/1, but if you can make a real direct deposit by 10/1 (and not withdrawal more than 80% of it) you’ll earn at least 1% APY in September and gain the possibility of a rate greater than 1% after 10/1.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 0.75% APY with a $500 minimum deposit. AARP members can get an 8-month CD at 0.85% APY. Ally Bank has a 11-month No Penalty CD at 0.75% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 0.35% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • CommunityWide Federal Credit Union has a 12-month CD at 1.00% APY ($1,000 min). Early withdrawal penalty depends on how early you withdraw. Anyone can join this credit union via partner organization ($5 one-time fee).

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are NOT FDIC-insured and thus come with a possibility of principal loss, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund (note the upcoming changes) currently pays an 0.03% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.08%.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.82% SEC yield ($3,000 min) and 0.92% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 0.51% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.64% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. Note that there was a sudden, temporary drop in net asset value during the March 2020 market stress.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section probably isn’t very interesting as T-Bills are yielding close to zero!

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 9/8/2020, a new 4-week T-Bill had the equivalent of 0.10% annualized interest and a 52-week T-Bill had the equivalent of 0.15% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 0.08% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -0.04% (!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between May 2020 and October 2020 will earn a 1.06% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 2020, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend nor use any of these anymore.

  • One of the few notable cards left in this category is Mango Money at 6% APY on up to $2,500, along with several hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. If you want rates above 2% APY, this is close to the only game in town.

  • Consumers Credit Union Free Rewards Checking (my review) still offers up to 4.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. The Bank of Denver has a Free Kasasa Cash Checking offering 2.50% APY on balances up to $25,000 if you make 12 debit card purchases and at least 1 ACH credit or debit transaction per statement cycle. If you meet those qualifications, you can also link a savings account that pays 1.50% APY on up to $50k. Thanks to reader Bill for the updated info. Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • Greenwood Credit Union has a 5-year certificate at 1.50% APY ($5,000 min), 4-year at 1.00% APY, 3-year at 1.20% APY, and 2-year at 0.90% APY. The early withdrawal penalty for the 5-year is 6 month of interest. Anyone can join this credit union by maintaining $5 in a share savings account.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Vanguard has a 5-year at 0.50% APY right now. Be wary of higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. At this writing, Vanguard has a 10-year at 0.85% APY. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently a sad 0.10% rate). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. As of 9/9/2020, the 20-year Treasury Bond rate was 1.22%.

All rates were checked as of 9/9/2020.

Filed Under: Banking, Deals & Offers, Investing //

Charlie Munger: Huge Compilation of Annual Shareholder Letters, Interviews, Op-Eds, Speech Transcripts

Posted on September 1, 2020 // 5 Comments

Charles Munger is probably best known as the Vice Chairman of Berkshire Hathaway and longstanding investing partner of Warren Buffett. However, he has also been the CEO and/or Chairman of the Board of multiple other companies. This means there many additional sources of knowledge and wisdom beyond just BRK shareholder letters. I recently discovered this huge 1,000 page compilation (PDF) of everything Munger, including annual letters from Blue Chip Stamps, Wesco, and Daily Journal as well as his op-ed contributions and transcripts of speeches. Found at ValueWalk, the PDF includes links to most of the individual sources inside as well. Thanks to all the folks that worked hard to preserve this material.

There was no table of contents, so I started making a list of all the goodies inside:

Annual Shareholder Letters and Meeting Transcripts

  • Blue Chip Stamps, Annual Shareholder Letters, 1978-1982. Blue Chip Stamps was merged into Berkshire Hathaway in 1983.
  • Wesco Financial Corporation, Annual Shareholder Letters and/or Meeting Notes, 1983-2010. Wesco Financial was officially merged into Berkshire Hathaway in 2011.
  • Q&A sesssion with Charlie Munger July 1st, 2011. An event paid for by Charlie Munger after the Wesco merger.
  • Daily Journal Corporation Annual Meeting Notes and/or Transcript, 2013-2018.

Speech Transcripts, Op-Eds, Interviews, Etc.

  • Opinion Pieces, 1984.
  • Speech by Charlie Munger to the Harvard School, 1986.
  • Resignation of Mutual Savings from US League of Savings Institutions, May 30, 1989.
  • A Lesson On Elementary, Worldly Wisdom As It Relates To Investment Management & Business, 1995.
  • Practical Thought about Practical Thought?, 1996.
  • Investment Practices of Leading Charitable Foundations, 1998.
  • Foundation Financial Officers Group Master’s Class, 1999.
  • A Perverse Use of Antitrust Law, 2000.
  • Philanthropy Round Table, 2000
  • Optimism Has No Place in Accounting, 2002
  • The Great Financial Scandal of 2003
  • Herb Kay Undergraduate Lecture at the University of California, Santa Barbara Economics Department, 2003.
  • Munger speech at University of California, Santa Barbara, 2004.
  • The Pyschology of Human Misjudgment,
  • Charlie Munger – USC Commencement Speech 2007
  • Sacrificing To Restore Market Confidence, 2009.
  • Basically, It’s Over. A parable about how one nation came to financial ruin, 2009.
  • Wantmore, Tweakmore, Totalscum, and the Tragedy of Boneheadia: A Parody about the Great Recession, 2011.
  • A Conversation with Charlie Munger and Michigan Ross Dean Scott DeRue, 2017.
  • Charlie Munger, Unplugged, 2019.
  • Foreword to the Chinese Edition of Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger (by Louis Li).

This should keep me busy for a while!

Filed Under: Frugal Living, Inspirational, Investing //

Vanguard Prime Money Market Fund Changes

Posted on August 30, 2020 // 3 Comments

Vanguard is making a few changes to their Vanguard Prime Money Market Fund, which is often their highest-yielding option:

  • Name change. Vanguard Prime Money Market Fund will change its name to Vanguard Cash Reserves Federal Money Market Fund.
  • Even safer. It will now invest only in securities fully backed by the U.S. government or cash. I believe that they used to invest in some highly-rated short-term commercial paper.
  • Even cheaper. Basically, everyone will get the lower expense ratio from Admiral shares which previously had a $5,000,000 minimum (!). The minimum investment to get started is still $3,000.
  • No more checkwriting. You can still get checkwriting with certain other funds, including the Vanguard Federal Money Market Fund.

The actionable event here is that if you own the Prime Investor Shares (VMMXX), you can manually convert to the Admiral Shares (VMRXX) to immediately take advantage of the lower expense ratio (and thus higher yield) instead of waiting until possibly 2021:

Existing Investor share owners (VMMXX): You have the option to immediately convert† to Admiral Shares to begin taking advantage of the lower expense ratio. You can find simple step-by-step instructions here. If you don’t initiate a conversion, you’ll be automatically converted sometime between late 2020 through 2021. Note: Our checkwriting service isn’t available for the fund’s Admiral share class. Checkwriting is available for Vanguard Federal Money Market Fund and other Vanguard money market funds.

While this fund usually offers one of the highest cash sweep amongst brokerage accounts, the interest rate is still really low at about 0.10% SEC yield right now. At the same time, many online savings accounts are at about 0.80%. Still, if you own this fund you might as well convert now. The Vanguard Federal Money Market Fund remains Vanguard’s default cash sweep option, which historically has yielded slightly less than Vanguard Prime.

Filed Under: Investing //

Schwab Plan Review: Free DIY Financial Planning Software

Posted on August 27, 2020 // 6 Comments

Schwab has rolled out a new digital financial planning tool called Schwab Plan. They claim it to be a simplified version of the same financial planning software used by many human financial advisors. From their press release:

Schwab Plan is a digital self-guided financial plan available through Schwab.com that helps investors build a personalized plan that includes a range of factors such as desired retirement age, retirement goals, social security expectations, portfolio risk profile and asset allocation, and various income sources.

[…] they are able to generate a retirement plan that shows retirement goals and probability of funding those goals, a comparison of an individual’s current asset allocation to a recommended allocation based on plan inputs, and suggested next steps to get and stay on track.

Access to this tool is free to anyone with any type of Schwab account. (Eventually, this should include TD Ameritrade clients as well.) There is no minimum asset requirement and you don’t need to sign up for a new service. For example, I was able to access it with only a Schwab PCRA brokerage window account. Here are a few initial impressions and screenshots after testing it out.

First, you enter some basic personal information like current age, gender, retirement age, and life expectancy:

Next, you estimate your income needs in retirement. They offer additional assistance in estimated your health insurance costs in retirement. You then enter your assets and income sources. Your Schwab accounts are automatically imported, and you can manually add the raw balances of additional external accounts (no account aggregation). They use your information to estimate your Social Security income, and also ask about stock options and restricted stock units.

(They don’t ask about children, college savings, term life insurance, disability insurance, or any of those smaller details that a full-service advisor would ask about. There is also very little customization available in terms of recognizing your external asset allocations.)

Once everything is entered, they run a Monte Carlo simulation to estimate your probability of success.

You can then adjust the variables, such your retirement age and future spending, in order to see how it affects your success rate. I found the analysis to be reasonably consistent with my other research, and I liked that the results changed significantly for an early retirement (45 year period) as opposed to a traditional retirement (30 year period). They use a “confidence zone” system:

(The Monte Carlo simulations above does not equate to an 86% confidence level. This was after making some tweaks to improve the results.)

Bottom line. Schwab has added a free financial planning tool for all of their customers (no minimum asset requirement). After testing it out, it is not quite “professional-grade”, but I did find it to be slightly more advanced than most other free options. I would recommend trying it out if you have any type of Schwab account. Of course, it also provides a pathway to upgrade to their other portfolio management services, and I still have concerns about their Intelligent Portfolios product.

Filed Under: Deals & Offers, Investing, Retirement, Tools & Calculators //

Vanguard Fair Value CAPE Chart

Posted on August 21, 2020 // 6 Comments

A lot of investment “analysis” is simply finding a reasonable and convincing way to explain present market prices. Whatever the price is, you can find a story to match. Working backwards like that means there usually isn’t much useful nor actionable information. I say this before I link to the recent Vanguard article Why equity markets have recovered, mainly for this chart of what they see as a “fair value” for CAPE (cyclically-adjusted PE) or PE10 (price/average earnings over last 10 years):

Vanguard’s U.S. fair value CAPE framework is based on a statistical model that corrects measures of cyclically adjusted price-to-earnings ratios for the level of inflation expectations and for interest rates. The statistical model specification is a three-variable vector error correction including equity-earnings yields, ten-year trailing inflation, and ten-year U.S. Treasury yields.

Basically, low interest rates (with low inflation) mean that stock earnings are more attractive and thus result in higher price/earnings (PE) ratios. The rest is the usual hedging and disclaimers. “The market could go up or down from here.”

Rates are not just “low”, they are the lowest in history. The real yield on 30-year TIPS (inflation-linked Treasury bonds) are negative for the first time in history – so low that people are willing to hand over $116 today in order to get only $100 back (adjusted for inflation) after 30 years! If bonds are the most expensive in history, does that mean the stock market should be the most expensive in history? The S&P 500 did just hit an all-time high amidst enormous economic suffering for much of the working population. This chart tries to make sense of things, but still I don’t like the idea of calling the current state of things “rational”.

Filed Under: Investing //

Chase You Invest Brokerage Transfer Bonus: Up to $725 Cash

Posted on August 20, 2020 // 8 Comments

Financial institutions increasingly want all of your money under one roof. Brokerage firms and robo-advisors are adding savings accounts and debit cards. Banks want to let you trade stocks. If you have built up some sizeable assets, you can make extra money when they decide to pay you to move over your assets. Try them out, see if you like them, and move again if you need to.

The self-directed brokerage arm for Chase is You Invest, and they are currently offering up the following transfer bonuses:

  • $200 with $25,000-$99,999 in qualifying new money
  • $350 with $100,000–$249,999 in qualifying new money
  • $725 with $250,000+ in qualifying new money

The cash bonus applies to any new You Invest Trade account (Brokerage, Traditional IRA, or Roth IRA) and is limited to one per customer. You can only participate in one Chase Private Client Checking, Chase Sapphire Checking or You Invest new money bonus in a 12 month period from the last bonus enrollment date. New money must come from outside J.P. Morgan, Chase, or their affiliates.

The $200 bonus is best in terms of percentage (0.8% of $25,000), but in terms of time/effort you may just want to get the biggest bonus. Funds must arrive within 45 days of opening your account, and you must keep it there for 90 days after funding. Bonus arrives 10 business days after that, and may be reported on 1099-MISC. Given the current low interest rates, you may even consider depositing cash. I’m sure their interest in cash sweep is zero or close enough to zero, but you might also consider ultra-short bond ETFs like MINT (still possible to lose value).

If you have that much in ETFs, mutual funds, or stocks at another broker, you could perform an in-kind ACAT transfer over to You Invest, and all of your tax basis information should also move over. Your old broker may charge you an outgoing ACAT fee about about $75, although you should ask You Invest if they will reimburse you for this fee.

There have been some higher bonuses in the past for Sapphire Banking in which you could use You Invest assets to count towards the requirements (ex. $1,000 for $75k in assets), but they are not currently available. This is a relatively new product for Chase, so I wouldn’t expect a top-quality trading interface. If you mostly hold index ETFs, it should be fine.

Also see: BofA/Merrill Edge transfer bonus, M1 Finance transfer bonus

Filed Under: Deals & Offers, Investing //

Best Interest Rates on Cash – August 2020

Posted on August 11, 2020 // 8 Comments

Is it August? The days are all melding together in the MMB household. We’ve also reached the point where anything above 1% APY is worth a second look. Being willing to switch to bank or credit union CDs can still beat out Treasury bonds and/or brokerage cash sweep options that also pay nearly zero.

Here’s my monthly roundup of the best interest rates on cash for August 2020, roughly sorted from shortest to longest maturities. I track these rates because I keep 12 months of expenses as a cash cushion and also invest in longer-term CDs (often at lesser-known credit unions) when they yield more than bonds. Check out my Ultimate Rate-Chaser Calculator to see how much extra interest you’d earn by moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 8/11/2020.

High-yield savings accounts
While the huge megabanks make huge profits while paying you 0.01% APY, it’s easy to open a new “piggy-back” savings account and simply move some funds over from your existing checking account. The interest rates on savings accounts can drop at any time, so I list the top rates as well as competitive rates from banks with a history of competitive rates. Some banks will bait you with a temporary top rate and then lower the rates in the hopes that you are too lazy to leave.

  • Affirm has the top rate at the moment at 1.30% APY with no minimum balance requirements. I wonder how long this will last, as the rate is high but Affirm also charges really high interest to let folks buy jeans on a payment plan. There are several other established high-yield savings accounts at up to 1% APY for now.
  • Side note: HM Bradley is still advertising 3% APY for those that spent the previous quarter saving at least 20% of your direct deposit. Might be worth a gamble to open now and hope that it somehow stays at 3% APY at the next rate reset on October 1st.

Short-term guaranteed rates (1 year and under)
A common question is what to do with a big pile of cash that you’re waiting to deploy shortly (just sold your house, just sold your business, legal settlement, inheritance). My usual advice is to keep things simple and take your time. If not a savings account, then put it in a flexible short-term CD under the FDIC limits until you have a plan.

  • No Penalty CDs offer a fixed interest rate that can never go down, but you can still take out your money (once) without any fees if you want to use it elsewhere. Marcus has a 7-month No Penalty CD at 0.90% APY with a $500 minimum deposit. AARP members can get an 8-month CD at 1.10% APY. Ally Bank has a 11-month No Penalty CD at 0.75% APY for all balance tiers. CIT Bank has a 11-month No Penalty CD at 0.50% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • CommunityWide Federal Credit Union has a 12-month CD at 1.10% APY ($1,000 min). Early withdrawal penalty depends on how early you withdraw. Anyone can join this credit union via partner organization ($5 one-time fee).

Money market mutual funds + Ultra-short bond ETFs
If you like to keep cash in a brokerage account, beware that many brokers pay out very little interest on their default cash sweep funds (and keep the difference for themselves). The following money market and ultra-short bond funds are NOT FDIC-insured and thus come with a possibility of principal loss, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 0.08% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund which has an SEC yield of 0.10%. You can manually move the money over to Prime if you meet the $3,000 minimum investment.
  • Vanguard Ultra-Short-Term Bond Fund currently pays 0.92% SEC yield ($3,000 min) and 1.02% SEC Yield ($50,000 min). The average duration is ~1 year, so there is more interest rate risk.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 0.66% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 0.86% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months. Note that there was a sudden, temporary drop in net asset value during the March 2020 market stress.

Treasury Bills and Ultra-short Treasury ETFs
Another option is to buy individual Treasury bills which come in a variety of maturities from 4-weeks to 52-weeks. You can also invest in ETFs that hold a rotating basket of short-term Treasury Bills for you, while charging a small management fee for doing so. T-bill interest is exempt from state and local income taxes. Right now, this section probably isn’t very interesting as T-Bills are yielding close to zero!

  • You can build your own T-Bill ladder at TreasuryDirect.gov or via a brokerage account with a bond desk like Vanguard and Fidelity. Here are the current Treasury Bill rates. As of 8/11/2020, a new 4-week T-Bill had the equivalent of 0.08% annualized interest and a 52-week T-Bill had the equivalent of 0.15% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 0.08% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a -.01% (yikes!) SEC yield. GBIL appears to have a slightly longer average maturity than BIL.

US Savings Bonds
Series I Savings Bonds offer rates that are linked to inflation and backed by the US government. You must hold them for at least a year. There are annual purchase limits. If you redeem them within 5 years there is a penalty of the last 3 months of interest.

  • “I Bonds” bought between May 2020 and October 2020 will earn a 1.06% rate for the first six months. The rate of the subsequent 6-month period will be based on inflation again. More info here.
  • In mid-October 2020, the CPI will be announced and you will have a short period where you will have a very close estimate of the rate for the next 12 months. I will have another post up at that time.

Prepaid Cards with Attached Savings Accounts
A small subset of prepaid debit cards have an “attached” FDIC-insured savings account with exceptionally high interest rates. The negatives are that balances are capped, and there are many fees that you must be careful to avoid (lest they eat up your interest). Some folks don’t mind the extra work and attention required, while others do. There is a long list of previous offers that have already disappeared with little notice. I don’t personally recommend nor use any of these anymore.

  • The only notable card left in this category is Mango Money at 6% APY on up to $2,500, along with several hoops to jump through. Requirements include $1,500+ in “signature” purchases and a minimum balance of $25.00 at the end of the month.

Rewards checking accounts
These unique checking accounts pay above-average interest rates, but with unique risks. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Some folks don’t mind the extra work and attention required, while others do. Rates can also drop to near-zero quickly, leaving a “bait-and-switch” feeling. If you want rates above 2% APY, this is close to the only game in town.

  • Consumers Credit Union Free Rewards Checking (my review) still offers up to 4.09% APY on balances up to $10,000 if you make $500+ in ACH deposits, 12 debit card “signature” purchases, and spend $1,000 on their credit card each month. The Bank of Denver has a Free Kasasa Cash Checking offering 3% APY on balances up to $25,000 if you make 12 debit card purchases and at least 1 ACH credit or debit transaction per statement cycle. If you meet those qualifications, you can also link a savings account that pays 2% APY on up to $50k. (Effective with the qualification cycle beginning August 20, 2020, the rates on Kasasa Cash and Kasasa Saver are changing to 2.5% APY and 1.5% APY, respectively.) Thanks to reader Bill for the updated info. Find a locally-restricted rewards checking account at DepositAccounts.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but come with an early withdrawal penalty. By finding a bank CD with a reasonable early withdrawal penalty, you can enjoy higher rates but maintain access in a true emergency. Alternatively, consider building a CD ladder of different maturity lengths (ex. 1/2/3/4/5-years) such that you have access to part of the ladder each year, but your blended interest rate is higher than a savings account. When one CD matures, use that money to buy another 5-year CD to keep the ladder going. Some CDs also offer “add-ons” where you can deposit more funds if rates drop.

  • Connexus Credit Union has a 5-year certificate at 1.56% APY ($5,000 min), 4-year at 1.46% APY, 3-year at 1.26% APY, and 2-year at 1.11% APY. Note that the early withdrawal penalty for the 5-year is 365 days of interest. Anyone can join this credit union via partner organization for a one-time $5 fee.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. You may need an account to see the rates. These “brokered CDs” offer FDIC insurance and easy laddering, but they don’t come with predictable early withdrawal penalties. Vanguard has a 4-year at 0.35% APY right now. Be wary of higher rates from callable CDs listed by Fidelity.

Longer-term Instruments
I’d use these with caution due to increased interest rate risk, but I still track them to see the rest of the current yield curve.

  • Willing to lock up your money for 10 years? You can buy long-term certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable early withdrawal penalties. At this writing, there are no available offerings. Watch out for higher rates from callable CDs from Fidelity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a unique guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently a sad 0.10% rate). I view this as a huge early withdrawal penalty. But if holding for 20 years isn’t an issue, it can also serve as a hedge against prolonged deflation during that time. As of 8/11/2020, the 20-year Treasury Bond rate was 1.10%.

All rates were checked as of 8/11/2020.

Filed Under: Banking, Deals & Offers, Investing //

Free CFA Investment and Portfolio Management Books

Posted on August 10, 2020 // Leave a Comment

The CFA Institute Research Foundation publishes some short finance ebooks on Amazon Kindle that qualify as continuing education credits for Chartered Financial Analysts (CFAs), a type of investment professional certification. The Finance Buff points out that several are free to download right now for everyone, while others are $0.99 if you have some No-Rush Shipping credits that expire soon. Download them now while they are free, read later at your own pace.

Here is a list of booklets published by CFA Institute Research Foundation, and below are specific titles that are currently free as of this writing:

Filed Under: Deals & Offers, Investing //
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