Personal Finance: Recognizing Control and Using Your Time Efficiently

Posted on February 21, 2019 // 7 Comments

Morgan Housel wrote a post called The Biggest Returns which really resonated with my outlook on investing and personal finance. The main idea was that you should consider the impact of your efforts in relation to the time and energy spent.

The idea that reducing your needs has the same impact as increasing your income – but the former is more certain and in your control than the latter, so it has a higher expected value – is as true for someone spending $15,000 a year as it is someone spending $15 million per year.

The hard part is becoming satisfied with spending less. […] For me it’s been realizing that what makes people happy is having options – doing what you want, with who you want, when you want, where you want. And options come from savings and assets, which are the opposite of spending.

Stock returns: Limited control. I decided on an asset allocation and invested my money in low-cost, low-turnover investments. Learning about investing and asset allocation initially was a good investment of time, but I still have limited control of the outcome. More importantly, this gave me the conviction and patience that it will work out in the long run. But I still might lose money in any given year, and I can’t just put in more effort and improve that return. I only check in on my portfolio quarterly.

Cash returns: Moderate control. About 1/3rd of my portfolio is in high-quality bonds, which in my definition includes cash and certificates of deposit. Here, I have some more control. For example, if I put money into a 5-year CD at 4% APY, I have high confidence it will do better than a 5-year Treasury bond at 2.50% yield. Sometimes there are such opportunities for the individual investor, sometimes there aren’t. Therefore, I track the best interest rates monthly.

Income: Moderate to significant control. Income is obviously important, and I while would rate it as more important than spending, that doesn’t mean spending in not also very important. There are plenty of people who earn $250k and spend $250k per year, while a $85k earner could spend $60k and save even more. But that same 250k earner has the ability to “see the light” and have their saving explode over the next few years. Unfortunately, there are no easy, foolproof ways to earn a high income. Of course, you should invest in yourself and improve your marketable skills and thus increase your human capital. Some people can move up the corporate ladder, others will do better with a more entrepreneurial route.

Personal spending: Significant control. Managing your spending is all about priorities, but there are two simple ways to attack your spending. First, you could start from the bottom and get rid of the more questionable “wants”: Expensive food habits (coffee, alcohol, snacks), monthly entertainment subscriptions, gambling, etc). Second, you could start from the top and pair down the big “needs”. I could have gotten a mortgage approval for a 3,500 sf house in my neighborhood. I live in a 2,000 sf house. I could pay cash for nearly any vehicle on the market. I bought a used minivan. I could have had fewer kids… Oops!

Credit cards, bank bonuses, and other “found money”: Significant control. You won’t get rich solely from taking advantage of credit card sign-up bonuses, maximizing your cash back, or picking up $10-$100 here and there each week, but I estimate that it adds up to $3,000+ each year for our household. $3,000 is a 5% increase to a $60,000 income, or a free annual vacation. You should pick and choose what works for you; for example I refuse to drive around town (to buy gift cards, redeem coupons, buy and resell, etc). I prefer deals that can be done with just clicks.

This is also a good reminder that even though I might not write about them repeatedly, your biggest returns on effort might be: get a better job, relocate to a city with greater relative opportunity (income vs. cost-of-living), move into a smaller house, and buy a cheaper car (or find cheaper transportation). On a daily basis, the things that catch my eye (and thus what I write about) are actionable ideas where I have control of the outcome.

Filed Under: Frugal Living, Investing //

Best Interest Rates on Cash – February 2019

Posted on February 4, 2019 // 4 Comments

Here’s my monthly roundup of the best interest rates on cash for February 2019, roughly sorted from shortest to longest maturities. Check out my Ultimate Rate-Chaser Calculator to get an idea of how much extra interest you’d earn if you are moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 2/3/19.

High-yield savings accounts
While the huge megabanks like to get away with 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 prioritize banks with a history of competitive rates. Some banks will bait you and then lower the rates in the hopes that you are too lazy to leave.

  • Redneck Bank offers 2.50% APY on balances up to $50,000. CIT Bank Savings Builder is now up to 2.45% APY with a $100 monthly deposit (with no balance limit). There are several other established high-yield savings accounts at 2% APY and up.
  • Got a lot of friends or followers? You can 4.30% APY on up to $50,000 for 30 days via the Empower app, plus another 30 days for each friend that you refer to the. First month is free + 11 referrals = 4.30% APY for a year.

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.

  • Marcus Bank has 13-month No Penalty CD at 2.35% APY with a $500 minimum deposit, Ally Bank has a 11-month No Penalty CD is at 2.30% APY with a $25k+ minimum, and CIT Bank has a 11-month No Penalty CD at 2.05% APY with a $1,000 minimum deposit. 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. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Sallie Mae Bank has a 1-year CD at 2.85% APY ($2,500 minimum) with an early withdrawal penalty of 90 days of interest.

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 money for themselves). The following money market and ultra-short bond funds are not FDIC-insured, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 2.48% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund, which has an SEC yield of 2.32%. 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 2.73% SEC Yield ($3,000 min) and 2.83% 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 2.97% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 3.07% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

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.

  • 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 2/1/19, a 4-week T-Bill had the equivalent of 2.41% annualized interest and a 52-week T-Bill had the equivalent of 2.56% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 2.30% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 2.19% 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 November 2018 and April 2019 will earn a 2.82% 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-April 2019, 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 or use any of these anymore.

  • The only notable card left in this category is Mango Money at 6% APY on up to $2,500, but there are many hoops to jump through. Signature “credit” purchases of $1,500 or more and a minimum balance of $25.00 at the end of the month is needed to qualify for the 6.00%.

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. I don’t use any of these anymore, either.

  • The best one left is Consumers Credit Union, which offers 3.09% to 5.09% APY on up to a $10k balance depending on your qualifying activity. The highest tier requires their credit card in addition to their debit card (other credit cards offer $500+ in sign-up bonuses). Keep your 12 debit purchases just above the $100 requirement, as for every $500 in monthly purchases you may be losing out on cash back rewards elsewhere. Find a local rewards checking account at DepositAccounts.
  • If you’re looking for a non-rewards high-yield checking account, MemoryBank has a checking account with no debit card requirements at 1.60% APY.

Certificates of deposit (greater than 1 year)
CDs offer higher rates, but some with a 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.

  • NASA Federal CU has a 15-month certificate at 3.20% APY and a 25-month at 3.25% APY ($10,000 minimum). 182 day early withdrawal penalty. Anyone can join this credit unions with via membership in partner organization (see application). Ally Bank has a 14-month CD at 2.85% APY (no minimum). 60 day early withdrawal penalty.
  • United States Senate Federal Credit Union has a 5-year Share Certificate at 3.53% APY ($60k min), 3.47% APY ($20k min), or 3.41% APY ($1k min). Note that the early withdrawal penalty is a full year of interest. Anyone can join this credit union via American Consumer Council.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable fixed early withdrawal penalties. As of this writing, Vanguard is showing a 2-year non-callable CD at 2.65% APY and a 5-year non-callable CD at 3.10% APY. Watch out for 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 fixed early withdrawal penalties. As of this writing, Vanguard is showing a 10-year non-callable CD at 3.35% APY. Watch out for higher rates from callable CDs from Fidelity. Matching the overall yield curve, current CD rates do not rise much higher as you extend beyond a 5-year maturity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a 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. You could also view it as long-term bond and thus a hedge against deflation, but only if you can hold on for 20 years. As of 1/9/19, the 20-year Treasury Bond rate was 2.86%.

All rates were checked as of 2/3/19.



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

Historical IRA Contribution Limits 2009-2019

Posted on January 28, 2019 // 3 Comments

ira_heartIndividual Retirement Arrangements (IRAs) are way to save money towards retirement that also saves on taxes. For 2019, the annual contribution limit for either Traditional or Roth IRAs increased to $6,000 (it is roughly indexed to inflation). The additional catch-up contribution allowed for those age 50+ stays at $1,000 (for a total of $7,000). You can’t contribute more than your taxable compensation for the year, although a spouse can contribute with no income if the other person has enough income.

Historical limits. Since I enjoy visual aides, here’s an updated historical chart and table of contribution limits for the last 11 years. I’m happy to say that we’ve both done the max since 2004. Consistently saving for a decade can result in some fat nest eggs!

Year IRA Contribution Limit Additional Catch-Up Allowed (Age 50+)
2009 $5,000 $1,000
2010 $5,000 $1,000
2011 $5,000 $1,000
2012 $5,000 $1,000
2013 $5,500 $1,000
2014 $5,500 $1,000
2015 $5,500 $1,000
2016 $5,500 $1,000
2017 $5,500 $1,000
2018 $5,500 $1,000
2019 $6,000 $1,000

 

Traditional IRAs. If you are covered by a retirement plan at work, deductibility of your contribution to a Traditional IRA is based on your modified adjusted gross income (MAGI) and tax-filing status. See the IRS page on IRA deduction limits. However, there are no income restrictions as to who can contribute to the full contribution limit for a Traditional IRA.

Roth IRAs. It doesn’t matter if you are covered by a retirement plan at work for the Roth IRA, and contributions to a Roth are never deductible (but they aren’t taxed on upon qualified withdrawal). However, the contribution limit and overall eligibility may be capped based on your modified adjusted gross income (MAGI) and tax-filing status. See the IRS page on Roth IRA contribution limits. But wait… high-income earners may be able to get around these income restrictions with a Backdoor Roth IRA (non-deductible Traditional IRA + Roth conversion). Yeesh, I really wish they would simplify all this stuff.

Saver’s Credit. If your income is low enough (less than $63,000 AGI for married filing joint), the Saver’s Credit can get you back 10% to 50% of your contribution (of up to $2,000 per person) when you file your taxes.

Also see: 401k, 403b, TSP Historical Contribution Limits 2009-2019

Sources: IRS.gov, IRS.gov COLA Table [PDF]

Filed Under: Investing, Retirement //

401k, 403b, TSP Historical Contribution Limits 2009-2019

Posted on January 28, 2019 // 4 Comments

401k_limitsEmployer-based retirement plans like the 401(k), 403(b), and Thrift Savings Plan are not perfect, but they are often the best available option to save money in a tax-advantaged manner. For 2019, the employee elective deferral (contribution) limit for these plans increased to $19,000 (it is indexed to inflation). The additional catch-up contribution allowed for those age 50+ stays at $6,000 (for a total of $25,000).

Here’s a historical chart of contribution limits for the last 11 years (2009-2019).

Year 401k/403b Elective Deferral Limit Additional Catch-Up Allowed (Age 50+)
2009 $16,500 $5,500
2010 $16,500 $5,500
2011 $16,500 $5,500
2012 $17,000 $5,500
2013 $17,500 $5,500
2014 $17,500 $5,500
2015 $18,000 $6,000
2016 $18,000 $6,000
2017 $18,000 $6,000
2018 $18,500 $6,000
2019 $19,000 $6,000

 

The limits are the same for both Roth and “Traditional” pre-tax 401k plans, although the effective after-tax amounts can be quite different. Employer match contributions do not count towards the elective deferral limit. Curiously, some employer plans set their own limit on contributions. A former employer of mine had a 20% deferral limit, so if your income was $50,000 the most you could put away was $10,000 a year.

For 2019, the maximum contribution limit when you include both employer and employee contributions is $56,000, an increase of $1,000. The employer portion includes company match and profit-sharing contributions.

The employee salary deferral max limit applies even if you participate in multiple 401k plans.

Sources: IRS.gov, IRS.gov COLA Table [PDF], IRS on multiple plans.

Filed Under: Investing, Retirement //

Investing $10,000 Every Year For the Last 10 Years, 2009-2018

Posted on January 22, 2019 // 3 Comments

keepcalmInstead of just looking at one year of returns, I prefer taking a longer view. Most successful savers invest money each year over a long period of time, these days often into a target-date fund (TDF). Don’t get caught up in the daily news reporting the recent performance of the Dow or S&P 500.

Investment benchmark. There are many possible choices for an investment benchmark, but I chose the Vanguard Target Retirement 2045 Fund. This all-in-one fund is low-cost, highly diversified, and available in many employer retirement plans as well open to anyone with an IRA. In the early accumulation phase, this fund is 90% stocks (both US and international) and 10% bonds (investment-grade domestic and international). I think it’s a solid default choice where you could easily do worse over the long run.

Investment amount. For the last decade, the maximum allowable annual contribution to a Traditional or Roth IRA has been roughly $5,000 per person. The maximum allowable annual contribution for a 401k, 403b, or TSP plan has been over $10,000 per person. If you have a household income of $67,000, then $10,000 is right at the 15% savings rate mark. Therefore, I’m going to use $10,000 as a benchmark amount. It’s easy to multiply the results as needed.

A decade of real-world savings. To create a simple-yet-realistic scenario, what would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 10 years. You’d have put in $100,000 over time, but in more manageable increments. With the handy tools at Morningstar and a Google spreadsheet, we get this:

Investing $10,000 every year for the last decade would have resulted in a $57,000 investment gain. If, for example, you were a couple that both maxed out their 401k and IRAs at roughly $20k each or $40k total per year, that would leave you with a gain of roughly $230,000 over the last decade (and a total balance of $630,000).

Timing still matters, but not as much as you might think due to the dollar-cost averaging and longer time horizon. More importantly, you can’t control that part. You have much more control over how much you save. Here are previous results for January 2007 to December 2016 and January 2008 to December 2017.

Work on improving your career skills (or start your own business), save a big chunk of your income, and then invest it in productive assets. Keep calm and repeat. Our path to financial freedom can be mostly explained by such behavior. The only “secret” here is consistency. We maxed out both IRA and the 401k salary deferral limits nearly every year since 2004. You can build wealth with something as accessible and boring as the Vanguard Target Retirement fund. We received no inheritances and don’t pay a brilliant hedge fund manager.

Filed Under: Investing, Retirement //

Chart: Stock Market Declines Are More Common Than You Think

Posted on January 14, 2019 // 1 Comment

prepyourIf you invest in stocks, you know that they go up and down. Below is an S&P 500 histogram (source) showing the distribution of annual returns, which were negative 1/3rd of the time (and thus positive 2/3rd of the time). Not bad, you’ll take those odds, right?

sp500_hist2014

But as the last part of 2018 showed us, returns aren’t all about January to December. There can be big swings in a single month or two which leave people stressed or even panicked. Dimensional Fund Advisors (DFA) had an article about the recent market volatility which included an interesting chart tracking the largest intra-year gains and losses (defined as peak to trough, and trough to peak).

Bottom line. Stock market declines are more common than you think. Since 1979, the average intra-year decline was about 14%! At the same time, 33 out of out 39 years managed to end up with a positive annual return when measured from January to December.

Filed Under: Investing //

Best Interest Rates on Cash – January 2019

Posted on January 9, 2019 // 13 Comments

Here’s my monthly roundup of the best interest rates on cash for January 2019, roughly sorted from shortest to longest maturities. Check out my Ultimate Rate-Chaser Calculator to get an idea of how much extra interest you’d earn if you are moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 1/9/19.

High-yield savings accounts
While the huge megabanks like to get away with 0.01% APY, getting higher rates is as easy as transferring money electronically from your checking account to an online savings account. The interest rates on savings accounts can drop at any time, so I prioritize banks with a history of competitive rates. Some banks will bait you and then lower the rates in the hopes that you are too lazy to leave.

Short-term guaranteed rates (1 year and under)
I am often asked 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 locked-in rate with no early withdrawal penalty. That means your interest rate can never go down, but you can still take out your money (once) if you want to use it elsewhere. Marcus Bank has 13-month No Penalty CD at 2.35% APY with a $500 minimum deposit, Ally Bank has a 11-month No Penalty CD is at 2.30% APY with a $25k+ minimum, and CIT Bank has a 11-month No Penalty CD at 2.05% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • First Internet Bank has a 1-year CD at 2.89% APY ($1,000 minimum) with an early withdrawal penalty of 180 days of interest.

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 money for themselves). The following money market and ultra-short bond funds are not FDIC-insured, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 2.44% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund, which has an SEC yield of 2.31%. 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 2.71% SEC Yield ($3,000 min) and 2.81% 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 2.96% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 2.98% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

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.

  • 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 1/8/19, a 4-week T-Bill had the equivalent of 2.40% annualized interest and a 52-week T-Bill had the equivalent of 2.60% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 2.24% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 2.16% 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 November 2018 and April 2019 will earn a 2.82% 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-April 2019, 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 or use any of these anymore.

  • The only notable card left in this category is Mango Money at 6% APY on up to $2,500, but there are many hoops to jump through. Signature purchases of $1,500 or more and a minimum balance of $25.00 at the end of the month is needed to qualify for the 6.00%.

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. I don’t use any of these anymore, either.

  • The best one left is Consumers Credit Union, which offers 3.09% to 5.09% APY on up to a $10k balance depending on your qualifying activity. The highest tier requires their credit card in addition to their debit card (other credit cards offer $500+ in sign-up bonuses). Keep your 12 debit purchases just above the $100 requirement, as for every $500 in monthly purchases you may be losing out on cash back rewards elsewhere. Find a local rewards checking account at DepositAccounts.
  • If you’re looking for a non-rewards high-yield checking account, MemoryBank has a checking account with no debit card requirements at 1.60% APY.

Certificates of deposit (greater than 1 year)
You might have larger balances, either because you are using CDs instead of bonds or you simply want a large cash reserves. 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.

  • INOVA Federal CU has a 14-month CD at 3.00% APY and a 20-month at 3.15% APY ($200 minimum). 180 day early withdrawal penalty. Premier America CU has 15-month CD at 3.10% APY ($1,000 minimum). Anyone can join these credit unions with via membership in partner organization (see application).
  • United States Senate Federal Credit Union has a 5-year Share Certificate at 3.69% APY ($60k min), 3.62% APY ($20k min), or 3.56% APY ($1k min). Note that the early withdrawal penalty is a full year of interest. Anyone can join this credit union via American Consumer Council.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable fixed early withdrawal penalties. As of this writing, Vanguard is showing a 2-year non-callable CD at 2.75% APY and a 5-year non-callable CD at 3.20% APY. Watch out for 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 fixed early withdrawal penalties. As of this writing, Vanguard is showing a 10-year non-callable CD at 3.45% APY. Watch out for higher rates from callable CDs from Fidelity. Matching the overall yield curve, current CD rates do not rise much higher as you extend beyond a 5-year maturity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a 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. You could also view it as long-term bond and thus a hedge against deflation, but only if you can hold on for 20 years. As of 1/9/19, the 20-year Treasury Bond rate was 2.86%.

All rates were checked as of 1/9/19.



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

My Money Blog Portfolio Asset Allocation and Performance Tracking, Year-End 2018

Posted on January 2, 2019 // 13 Comments

portpie_blank200

Here’s my final quarterly portfolio update for Q4 2018. This is how I track my real-world holdings, including 401k/403b/IRAs and taxable brokerage accounts but excluding our house, cash reserves, and a few side investments. The goal of this portfolio is to create enough income to cover our household expenses. As of 2018, we are “semi-retired” and have started spending a portion of our dividends and interest from this portfolio.

Actual Asset Allocation and Holdings

I use both Personal Capital and a custom Google Spreadsheet to track my investment holdings. The Personal Capital financial tracking app (free, my review) automatically logs into my accounts, adds up my balances, tracks my performance, and calculates my asset allocation. I still use my manual Google Spreadsheet (free, instructions) because it helps me calculate how much I need in each asset class to rebalance back towards my target asset allocation.

Here are my YTD performance and current asset allocation visually, per the “Holdings” and “Allocation” tabs of my Personal Capital account, respectively:

Stock Holdings
Vanguard Total Stock Market Fund (VTI, VTSMX, VTSAX)
Vanguard Total International Stock Market Fund (VXUS, VGTSX, VTIAX)
WisdomTree SmallCap Dividend ETF (DES)
Vanguard Small Value ETF (VBR)
Vanguard Emerging Markets ETF (VWO)
Vanguard REIT Index Fund (VNQ, VGSIX, VGSLX)

Bond Holdings
Vanguard Limited-Term Tax-Exempt Fund (VMLTX, VMLUX)
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX, VWIUX)
Vanguard Intermediate-Term Treasury Fund (VFITX, VFIUX)
Vanguard Inflation-Protected Securities Fund (VIPSX, VAIPX)
Fidelity Inflation-Protected Bond Index Fund (FIPDX)
iShares Barclays TIPS Bond ETF (TIP)
Individual TIPS securities
U.S. Savings Bonds (Series I)

Target Asset Allocation. Our overall goal is to include asset classes that will provide long-term returns above inflation, distribute income via dividends and interest, and finally offer some historical tendencies to balance each other out. I make a small bet that US Small Value and Emerging Markets will have higher future long-term returns (along with some higher volatility) than the more large and broad indexes, although I could be wrong. I don’t hold commodities, gold, or bitcoin as they don’t provide any income and I don’t believe they’ll outpace inflation significantly.

I believe that it is important to imagine an asset class doing poorly for a long time, with bad news constantly surrounding it, and only hold the ones where you still think you can maintain faith based on a solid foundation of knowledge and experience.

Stocks Breakdown

  • 38% US Total Market
  • 7% US Small-Cap Value
  • 38% International Total Market
  • 7% Emerging Markets
  • 10% US Real Estate (REIT)

Bonds Breakdown

  • 50% High-quality, Intermediate-Term Bonds
  • 50% US Treasury Inflation-Protected Bonds

I have settled into a long-term target ratio of 67% stocks and 33% bonds (2:1 ratio) within our investment strategy of buy, hold, and occasionally rebalance. (Small changes to 65/35 or 70/30 are also fine.) With a self-managed, simple portfolio of low-cost funds, we minimize management fees, commissions, and taxes.

Holdings commentary. On the bond side, I still like high-quality bonds with a short-to-intermediate duration of under 5 years or so. This means US Treasuries, TIPS, or investment-grade municipal bonds. I don’t want to worry about my bonds. Right now, my bond portfolio is about 1/3rd muni bonds, 1/3rd treasury bonds, and 1/3rd inflation-linked treasury bonds (and savings bonds).

On the stocks side, I made a few comments in my 2018 year-end asset class return review. US stocks went down in 2018, but international and emerging markets stocks did even worse. On the flipside, international and emerging markets are a lot cheaper based on various metrics. I remain satisfied with my mix, knowing that I will own whatever successful businesses come out of the US, China, or wherever in the future.

Performance commentary. According to Personal Capital, my portfolio went down 6.9% in 2018. I see that during the same period the S&P 500 has lost 6% (excludes dividends), Foreign Developed stocks lost 14%, and the US Aggregate bond index was basically flat. Of course I didn’t want to see my value fall, but most of the change was due to a lower P/E ratio as opposed to lower earnings from companies.

An alternative benchmark for my portfolio is 50% Vanguard LifeStrategy Growth Fund and 50% Vanguard LifeStrategy Moderate Growth Fund – one is 60/40 and the other is 80/20 so it also works out to 70% stocks and 30% bonds. That benchmark would have a total return of -5.9% for 2018.

I’ll share about more about the income aspect in a separate post.

Filed Under: Goals, Investing, Retirement //

Asset Class Returns by ETF, 2018 Year-End Review

Posted on January 1, 2019 // 4 Comments

yearendreviewAnother one in the books! I don’t track the market daily as I think the discussion is full of noise and after-the-fact justifications. I check my portfolio quarterly to see where to reinvest dividends. At the end of the year, I like to record the annual returns for select asset classes as benchmarked by passive mutual funds and ETFs. Here is the 2018 data taken from Morningstar after market close 12/31/18.

Commentary. In 2017, the performance of every asset class was positive. The lowest positive return was from short-term US Treasuries. For 2018, the performance of nearly every asset class was negative. The highest return was from… short-term US Treasuries. T-Bills and short-term Treasury bonds are slow, steady, and safe.

My favorite “keep-it-simple” multi-asset balanced fund, the Vanguard Target Retirement 2045 fund (roughly 90% diversified stocks and 10% bonds) was down about 7.9% in 2018. (It was up about 21.4% in 2017.) The benchmark for our personal portfolio, a more conservative mix of 70% stocks/30% bonds as we are close to living off it, was down about 6.5% in 2018. (It was up about 15.1% in 2017.)

Despite their relatively poor performance this year, I’m still satisfied with my international and emerging markets holdings on a valuation basis. I’m getting an overall earnings yield on VXUS (Total World ex-US) of ~7.8%, and out of that a dividend yield of ~3.2%. This is compared to VTI (Total US) with an overall earnings yield of ~5.5% and out of that a dividend yield of ~2.0%.

On the bond side, I am also happy that interest rates are back to the point where you actually might earn more than inflation. Currently, the 1-year US Treasury yields 2.63% and a 10-year yields 2.7%. The 5-year TIPS has a 1.0% real yield and a 10-year TIPS has 1.0% real yield.

As usual, I have no predictions about stock prices. However, I am confident that the hundreds of business that I own through these ETFs and mutual funds will choose to distribute a portion of their profits to me in the form of cash dividends. I am also confident that my US government and municipal bonds will pay the promised interest on time. I’ll try my best to spend those dividends and interest and ignore the price swings.

Filed Under: Investing //

Reader Question: Thoughts on Recent Stock Market Drop?

Posted on December 26, 2018 // 6 Comments

I don’t really enjoy talking about stock market movements, but given that it has been the most common reader question recently and I wanted to start answering more reader questions, here we are. My overall take is the same:

  • In the short term, nobody can predict the movement of the overall stock market. Especially over the next year. Sure, anyone can make a guess (“forecast”) and sometimes those guesses are right. But last time I looked, the billionaire list is overwhelmingly business owners, not market timers.
  • In the long term, I still believe that businesses will grow in value as product of human ingenuity and hard work. I like owning the entire haystack, knowing that I will own the next Amazon, Google, or Visa.
  • In the medium term, the awesome run during the last 10 years greatly increase the odds of modest returns over the next 10 years.

If you are already making withdrawals from your stock market investments (like me), that last bullet point may make you nervous. As a result of having modest expectations, my main goal is to not sell any shares. I don’t plan to spend 4% of my portfolio given the sequence of returns risk of a 40+ year time horizon. My plan is to limit my withdrawals to just the dividends distributed, whatever that might be.

Above is a chart of S&P 500 earnings, dividends, and buybacks over the last 20 years, via Axios. Dividends and buybacks are both ways that companies can direct profits to shareholders. However, you can see that the earnings jumped around and the stock buybacks tended to go up and down with those earnings, but the dividend payout had a much smoother ride. Companies raise dividends cautiously because they know that their profits can be cyclical, but their shareholders expect their dividends to be consistent.

If you are NOT making any withdrawals from your stock market investments, then your job is to tune out the short-term noise, and maintain the long-term faith in what you own. Why do you own stocks? Why do you own bonds? Why do you own real estate? I know that simple money rules may fit on a 3×5 index card, but you need a foundation of knowledge to keep you following those rules. Otherwise it’s just like saying being healthy is “don’t eat too much, and eat mostly plants”. Simple is not the same as easy.

This is also why financial advisors recommend a written “Investment Policy Statement”. That’s where you are supposed to write these things down when you are calm, so you can read it again when you are panicked.

Don’t anchor yourself to the high point of your portfolio. You reached $10,000 and now it’s $8,000? You reached $100,000 and now it’s down to $80,000? That high number was just a mirage anyway. Remember, the stock market is always either at an all-time high or in a drawdown. See: The Only Two States of Your Portfolio: Happy All-Time High or Sad Drawdown.

Filed Under: Investing // Tagged:

Robinhood (Not a) Checking Account 3% APY: SIPC Insurance Confusion

Posted on December 14, 2018 // 7 Comments


Update: Robinhood basically pulled the plug on the entire thing.

I don’t know who does PR for Robinhood, but they are good. I don’t ever recall this many media articles in a single day for a pseudo-checking account. Techcrunch, Barron’s, Business Insider, Bloomberg, USA Today, CNBC, Marketwatch… All coming the day after they deactivated some user accounts without notice and halted all options trading mid-day.

Robinhood announced a new Checking & Savings Cash Management account to expand their existing (required) brokerage account product. Robinhood is not a bank, and this account is not FDIC-insured. They did partner with Sutton Bank to provide a debit card, but deposits are not held at Sutton Bank. After reading through all their materials, here’s what is included:

  • 3% APY, subject to change at any time.
  • No minimum balance, no monthly fee, no overdrafts allowed.
  • ATM/Debit card with free access at 75,000+ ATMs (Allpoint and MoneyPass ATM networks). Only 4,000 of those ATMs accept deposits, and you are limited to depositing up to $1,000 per day and $5,000 per month.
  • “Pay bills, send and receive checks, transfer money, and set up direct deposit–all from the Robinhood app.”
  • “This process will not affect your credit score.” (I assume this means no credit check.)
  • No physical checkbooks. You request a check via app and they will send a physical check via USPS First Class mail the next business day. Limited to $2,500 per day and $10,000 total per month.
  • Mobile check deposit (take pictures on your smartphone) is limited to $2,500 per day and $10,000 total per month.

What does SIPC insurance mean? As with any other US brokerage account, Robinhood has SIPC insurance. This covers up to $500,000 by the SIPC in cash and securities, of which $250,000 can be in cash. SIPC does not cover changes in value to securities. However, you may be surprised to know that per the SIPC website, the following are considered securities:

  • Money market mutual funds.
  • Treasury bills and Treasury bonds.
  • Certificates of deposit.

Is your money earning 3% APY at Robinhood cash? securities? Robinhood is being rather vague about this. They say “we only use the safest assets, such as US treasuries”. Well, short-term US Treasuries are securities and they don’t even earn 3%. They call it a “cash management account”, but many cash management accounts have an FDIC-insured sweep (i.e. Fidelity CMA). Are they keeping it as pure “cash” and just crediting you money on the side somehow? Are they just creating another money market mutual fund? Money market mutual funds are securities, and tightly regulated ones, especially after 2008 when the Reserve Primary Fund did “break the buck”. Is the SIPC going to let them offer a loss-leader money market fund that pays out more interest than it earns?

(Update: The SIPC has some concerns.)

(Update 2: Looks like Robinhood got a phone call and they have to change the name from “Checking & Savings”. Seems like they will still try to work this in as a cash management account.)

In my opinion, if this is just a hyped-up money market mutual fund, the worst case scenario is that start-up Robinhood runs out of venture capital giving away free trades and crazy interest and both the brokerage fails and the money market fund has issues. This means you may not have access to your money for a while. The Reserve fund mentioned above gave back 99 cents on the dollar, but it took over a year (!) for all the money to be distributed. No interest was paid during that lost time. Following that history, you will probably get most of your cash back eventually (up to the limits) since money market mutual funds must only hold relatively safe assets. Then there is the hassle from losing potentially your primary checking account and all the bill payments, direct deposits, etc.

In contrast, I feel that the FDIC has a more streamlined process to handle bank failures. Several banks fail every year. As long as you are within the limits, you’ll get every last penny back. Nearly all of the time, another bank will take over the deposits immediately and your transactions will keep posting as usual.

I see a lot of internet comments that are either “OMG I’m moving all my money here!” or “OMG you’d be stupid to keep any money here!”. I’m in the middle. I am signing up on the waitlist (that’s my referral link so I move up the waitlist) since it’s free and will read through the application fine print when the dust settles. Right now, Robinhood is just in hype mode. By the time they actually start accepting money, 3% APY might not be all that special.

In any case, I don’t plan to move all of my money or my daily transactions over there. I just don’t trust them enough as a young start-up with barebones customer service that discourages phone calls. With all of the various deposit and withdrawal limits, I would definitely consider maintaining a full-service checking account somewhere else.

If you like how this sounds but don’t have a Robinhood brokerage account yet, you should get your free share of stock first since you need that opened first anyway. WeBull also offers new users free trades and a free share of stock.

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

Best Interest Rates on Cash – December 2018

Posted on December 3, 2018 // 16 Comments

Here’s my monthly roundup of the best interest rates on cash for December 2018, roughly sorted from shortest to longest maturities. Check out my Ultimate Rate-Chaser Calculator to get an idea of how much extra interest you’d earn if you are moving money between accounts. Rates listed are available to everyone nationwide. Rates checked as of 12/3/18.

High-yield savings accounts
While the huge megabanks like to get away with 0.01% APY, getting higher rates is as easy as transferring money electronically from your checking account to an online savings account. The interest rates on savings accounts can drop at any time, so I prioritize banks with a history of competitive rates. Some banks will bait you and then lower the rates in the hopes that you are too lazy to leave.

Short-term guaranteed rates (1 year and under)
I am often asked what to do with a big wad 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 locked-in rate with no early withdrawal penalty. That means your interest rate can never go down, but you can still take out your money (once) if you want to use it elsewhere. Ally Bank 11-month No Penalty CD is at 2.25% APY for $25k+ balance, Marcus Bank 13-month No Penalty CD at 2.15% APY with a $500 minimum deposit, and the CIT Bank 11-Month No Penalty CD at 2.05% APY with a $1,000 minimum deposit. You may wish to open multiple CDs in smaller increments for more flexibility.
  • Live Oak Bank has a 1-year CD at 2.85% APY ($2,500 minimum) with an early withdrawal penalty of 90 days of interest.

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 money for themselves). The following money market and ultra-short bond funds are not FDIC-insured, but may be a good option if you have idle cash and cheap/free commissions.

  • Vanguard Prime Money Market Fund currently pays an 2.30% SEC yield. The default sweep option is the Vanguard Federal Money Market Fund, which has an SEC yield of 2.19%. 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 2.64% SEC Yield ($3,000 min) and 2.74% SEC Yield ($50,000 min). The average duration is ~1 year, so there is a little more interest rate sensitivity.
  • The PIMCO Enhanced Short Maturity Active Bond ETF (MINT) has a 2.66% SEC yield and the iShares Short Maturity Bond ETF (NEAR) has a 2.75% SEC yield while holding a portfolio of investment-grade bonds with an average duration of ~6 months.

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.

  • 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 11/30/18, a 4-week T-Bill had the equivalent of 2.30% annualized interest and a 52-week T-Bill had the equivalent of 2.69% annualized interest.
  • The Goldman Sachs Access Treasury 0-1 Year ETF (GBIL) has a 2.18% SEC yield and the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL) has a 2.07% 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 November 2018 and April 2019 will earn a 2.82% 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-April 2019, 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 use any of these anymore.

  • The only notable card left in this category is Mango Money at 6% APY on up to $2,500, but there are many hoops to jump through. Signature purchases of $1,500 or more and a minimum balance of $25.00 at the end of the month is needed to qualify for the 6.00%.

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. I don’t use any of these anymore, either.

  • The best one left is Consumers Credit Union, which offers 3.09% to 5.09% APY on up to a $10k balance depending on your qualifying activity. The highest tier requires their credit card in addition to their debit card (other credit cards offer $500+ in sign-up bonuses). Keep your 12 debit purchases just above the $100 requirement, as for every $500 in monthly purchases you may be losing out on cash back rewards elsewhere. Find a local rewards checking account at DepositAccounts.
  • If you’re looking for a non-rewards high-yield checking account, MemoryBank has a checking account with no debit card requirements at 1.60% APY.

Certificates of deposit (greater than 1 year)
You might have larger balances, either because you are using CDs instead of bonds or you simply want a large cash reserves. 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.

  • Mutual One Bank has a 19-month CD at 3.04% APY ($500 min). 6 month early withdrawal penalty.
  • Greenwood Credit Union has a 5-year certificate at 3.75% APY ($1,000 min). Early withdrawal penalty is 6 months interest. United States Senate Federal Credit Union has a 5-year Share Certificate at 3.63% APY ($60k min), 3.57% APY ($20k min), or 3.51% APY ($1k min). Note that the early withdrawal penalty is a full year of interest. Anyone can join this credit union via American Consumer Council.
  • You can buy certificates of deposit via the bond desks of Vanguard and Fidelity. These “brokered CDs” offer FDIC insurance, but they don’t come with predictable fixed early withdrawal penalties. As of this writing, Vanguard is showing a 2-year non-callable CD at 3.10% APY and a 5-year non-callable CD at 3.55% APY. Watch out for 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 fixed early withdrawal penalties. As of this writing, Vanguard is showing a 10-year non-callable CD at 3.60% APY. Watch out for higher rates from callable CDs from Fidelity. Matching the overall yield curve, current CD rates do not rise much higher as you extend beyond a 5-year maturity.
  • How about two decades? Series EE Savings Bonds are not indexed to inflation, but they have a 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. You could also view it as long-term bond and thus a hedge against deflation, but only if you can hold on for 20 years. As of 11/30/18, the 20-year Treasury Bond rate was 3.19%, so this EE bond is no longer offering a huge premium.

All rates were checked as of 12/3/18.



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