The Best Deal in Fixed Income: Online Savings Accounts

Max members are earning approximately nine times as much on cash as the national average.

Max members are earning approximately nine times as much on cash as the national average.

We all know that interest rates have remained low for the last eight years, a deliberate policy on the part of the Fed to keep the cost of funding low to help spur the economy.  This has made it easier for people to borrow money to buy homes, propping up the housing market. It has been good for the stock markets, helping companies refinance high-cost debt and fund share repurchases.  And it’s been favorable to hedge funds as well, reducing the cost of leverage used to boost returns.

Where low rates have had a negative effect is on investors’ cash in the bank, which yields barely anything.

There’s something odd at play this time around, though.  Historically, money market funds yielded more than bank savings accounts.  No longer.  Most money market funds yield a small fraction of what is currently being earned by Max members.

Even more surprising, though, is the fact that term deposits and longer-term bonds are yielding far less than online banks these days.  The yield on the 2-Year Treasury stands at 0.84%, and 5 Year CDs at most brick-and-mortar banks hover around 0.60%. At Chase Bank, a 10-year CD pays 1.05% — and that’s only if you keep $100,000 or more in the CD, and lock up your money for 10 years.

We at Max are puzzled as to why investors would buy 2 Year Treasurys or lock their funds up in bank CDs when it’s possible to stay liquid and earn up to 1.05% on FDIC-insured bank deposits, with no minimum deposit level.

With rates expected to rise, online banks seem like the most logical place to keep cash. As interest rates go up, cash held in these accounts can be expected to follow the upward movement in rates. With Max, cash automatically flows to the banks with the best rates, even as these banks vie to offer the highest yield on savings. This happens while keeping cash safely below the FDIC insurance limits at each bank.

While hedge funds can’t take advantage of the higher yields available through online banks, individual investors can earn significantly more by keeping cash in these online accounts. Learn how MaxMyInterest.com can help with a fully-automated solution that makes it easy to open and manage online bank accounts, all without changing how you interact with your existing checking account.

Tweet about this on TwitterShare on LinkedInShare on FacebookShare on Google+Email this to someonePrint this page

5 Finance Tips for New Parents

5 Finance Tips for New Parents

Some decisions you make now can affect your family’s financial picture for decades.

Expecting a baby? Think your newborn will go to college someday? It sounds premature to begin thinking about tuition now, but it’s just good financial planning. Some decisions you make now, before your baby is born or while you still have a tiny newborn, can affect your family’s financial picture for decades. Here are five finance tips for new parents:

1. Set up a 529 plan

A 529 plan account allows you to set aside money for college, graduate school, and other educational expenses while gaining substantial tax advantages. The accounts can be used for the named beneficiary — your baby — as well as any siblings or descendants, so you won’t lose the money if your child grows up to be a rock star or professional athlete and never goes to college. Because of the power of compounding, money that you contribute at birth for your child’s higher education will grow over time, tax-free. If you add funds regularly — many plans offer automatic deductions that let you contribute a set amount each month from your savings accounts — you could set aside a significant portion of your child’s tuition money by the time college comes around. Shop around for the best plans; each state has different rules. Consider choosing a plan that doesn’t require your child to attend college in a particular state, because you can’t know where your family will be living by then or what your child will prefer. Because of the tax advantages, it’s often worth your time to set up such a plan even if you don’t think you’ll have trouble funding your child’s tuition. The first $10,000 contributed each year is typically state tax deductible, so for someone living in a high tax state like New York or California, that could translate into a $1,000 savings on your state tax bill each year.  Not many other investments provide for a 10% gain on day one, and when combined with the fact that your 529 contributions grow tax-free, it’s obvious why establishing a 529 plan in the year that your child is born can be a wise finance move for new parents.

2. Set up baby’s first bank account

Relatives may choose to give your child money as a baby gift. Consider setting up a savings account in the child’s name or in trust for the child. You can choose your own bank, or select the one with the best interest rates, since your child likely won’t be using this money for years. Credit unions and online banks typically offer the best rates — which matter since you’re planning for many decades of compounding.  CapitalOne 360 offers online accounts for children that pay 0.75% in interest, and recently offered a promotion that funds the first $30 when parents set up an account for a minor.

3. Register for airline frequent-flier numbers

As soon as you start buying a separate airline seat for your baby — you’re not required to do this until age 2, but you may want to start earlier so the baby can sit in a car seat on the plane — sign up for frequent flier numbers on the airlines you fly most often. Just like an adult, a child of any age can amass airline rewards points to earn status while flying. Even if your baby isn’t a global traveller, this is important in oversold situations — air miles members are treated better than those without a frequent flyer number on file. Also consider applying for a passport in infancy, in case your family wants to travel overseas.  Even if your child can’t hold his or her head up yet, passport photos can be taken at home by lying your baby down on a white blanket, snapping a head-and-shoulders photo, and taking the memory card to your local photo store, where they can convert the file to passport-sized photos.

4. Add your baby as a beneficiary on your documents

The fourth finance tip is to check with your lawyer to make sure your baby is named in your will — or at least that you’ve put in a provision for your direct descendants without naming them. Also make certain you’ve added your baby as a beneficiary on all your legal and financial documents: bank accounts, 401(k)s and IRAs, pensions, life insurance, and anything else with value.

5. Set up an email address

Who knows if we’ll be using email by the time your baby is old enough to type. Just in case, new parents should sign up for a free email account with a popular service like Google’s Gmail. Try to get the baby’s name (Joseph.William.Smith@gmail.com) if possible, but don’t put into the account name itself any details that you’ll want to keep secret, like the baby’s birthdate. Email accounts are a necessity for virtually all online services, including bank accounts.  Once the email address is set up, you can also cc: your child’s email address whenever emailing family photos, creating a permanent storehouse for your baby that he or she will enjoy later on.

Tweet about this on TwitterShare on LinkedInShare on FacebookShare on Google+Email this to someonePrint this page