I'm speaking, of course, about money sitting in bank savings accounts and other moldy places. There, like The Man in the Iron Mask or The Count of Monte Christo, it is ignored by its keepers.
In truth, if you examine your banker, he would probably make a good stand-in for the Grinch. Like a used car dealer, he continues to believe that money is worth 20 percent or more (plus whatever fees he can tack on) if he's selling it to you, but your money is worth next to nothing when you deposit it.
I say this having searched the pathetic offers most banks are making for our cash and savings these days. Here's a side-by-side comparison based on national averages.
• Interest checking. These accounts recently averaged a whopping 0.79 percent, according to bankrate.com. In Dallas the biggest Grinch is Wells Fargo, offering a measly 0.20 percent on a money market account. Some may argue that it really isn't fair to expect much interest for cash that you could put to use at any minute. I don't buy the argument, however, since mutual fund money market accounts will let us use our cash at any minute and they're now paying about 3.5 percent.
• Six month Certificates of Deposit. The situation here is nearly as bad. Recently, the average rate on a 6 month CD from a large bank, according to Banxquote.com, was 2.73 percent. That's downright generous compared to the 0.20 percent on ready deposits at Wells Fargo, but it's still way less than the average money market mutual fund. More important, it's wildly less than a 6 month U.S. Treasury bill. These were recently yielding 4.27 percent.
• One year Certificates of Deposit. Same problem. The average large bank one year CD is yielding 3.29 percent while recently issued one year Treasury bills are yielding 4.37 percent. You can earn more in a no time commitment money market mutual fund than you can earn on a 1 year bank CD. That ain't right.
• Five year Certificates of Deposit. At five years, the gap is narrowing, but the banks are still stingy. The average large bank CD is yielding 3.89 percent while a 5-year Treasury, according to Bloomberg.com, is yielding 4.43 percent.
Indeed, the Deposit Opportunity Gap has seldom been greater. If you visit my website, www.scottburns.com, and click on "The DOG Report" you'll see how a $50,000 portfolio of average bank CDs compares to a $50,000 portfolio of U.S. Treasury obligations. The portfolio, which contains maturities of 3 months, 6 months, 1 year, 2 years, and 5 years, is currently showing a deposit opportunity gap (hence, the DOG Report) of $570.
That's how much more you'd earn in Treasury obligations than in comparable maturity average bank CDs. We update this report every week. There have been periods when the DOG has been larger--- like much of the year 2000--- but our bankers are definitely showing disdain for our cash.
The banks aren't doing this out of malice. As the Fed has raised interest rates this year, the "spread" bankers make their living on has narrowed. Everything they can do to lean against the rising cost of deposits helps their bottom line.
Unfortunately, their leaning against the rising cost of deposits hurts our bottom line.
So if you are a serious interest investor, it's time to scour your accounts. Search for undervalued, unloved money. Once you find it, move it. Find a home that will treat it better.
What, specifically, does that mean? Here are two recommendations.
• If you know money won't be needed for 2 to 5 years, invest it accordingly in longer term Treasury securities. You'll increase your yield substantially. If you have a good deal of money, this would be a good time to establish a Treasury ladder, owning securities that mature in one, two, three, four, and five years. You'll collect over 4 percent and have minimal interest rate risk.
• If you know money won't be needed for at least 5 years, consider putting it in I Savings Bonds. These will earn at a 6.73 percent annual rate until May. Those purchased between now and then will earn at 1.0 percent plus the trailing rate of inflation. The interest will accumulate tax-deferred, you'll have inflation protection, and inflation needs to only average 2.89 percent a year to beat the 3.89 percent yield on the average bank CD. Inflation would have to average 3.43 percent for an I Savings Bond to beat the 4.43 percent yield of a 5 year Treasury.
If you think, as I do, that inflation will be higher than 3.43 percent, then I Savings Bonds are a good deal.
This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
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