high yield savings vs. no penalty CDs

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bholm83
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high yield savings vs. no penalty CDs

Post by bholm83 »

I opened a Wealthfront account, right before the fed rate cut and the the APY went from 2.5 to 2.32%. I'm considering opening an account with Popular Direct (currently 2.55%) to park $70,000 to save up for a house since they are now the leaders in APY but am wondering if savings accounts are the best place to park cash?

My question is, there are some no penalty CD rates that are over 2%, and some regular CD rates that are around 2.3%. Do you think it is a better idea to park my cash in a CD rather than a variable APY savings account? 2.55% is so enticing but I imagine that won't stay like that for long. I just prefer my cash to be a bit more liquid in case I buy in the next year or two, but with the fed rate cuts I'm wondering if savings is the best place to park cash anymore. Anyone have a crystal ball that can tell me what the fed will do to my APY in the next year? :)

Thanks for help!
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Abe
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Re: high yield savings vs. no penalty CDs

Post by Abe »

With a no penalty CD, you get to lock in the rate for the term of the CD which is good if interest rates go down, but you can close it at any time without penalty if rates go up and invest at the higher rate. With the high yield savings account, you don't get the benefit of locking in the rate if interest rates go down. So I think the no penalty CD is better assuming the rates are similar.
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abyan
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Re: high yield savings vs. no penalty CDs

Post by abyan »

Based on advice given here last night, I just signed up for several no penalty CDs at Ally, 11 month term, 2.3% interest. My only concern with that savings account is whether that rate is going to stay that high. My CD will for another 11 months.
MI_bogle
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Re: high yield savings vs. no penalty CDs

Post by MI_bogle »

No penalty CD offers potential to get best of both worlds, maybe. But how much is that really earning you?

Just for perspective, 70K at 2.55% APY earns 1,808 over one year, compounded daily. At 2.32% the same amount would earn 1,643

A difference of $165 before taxes
I just prefer my cash to be a bit more liquid in case I buy in the next year or two
This really tips the balance for me - if your time frame is a year or two I don't think APY should be your top deciding factor, since they are so close - the difference in earned interest is pretty small. I would much rather factor in convenience and simplicity.
Lastrun
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Re: high yield savings vs. no penalty CDs

Post by Lastrun »

MI_bogle wrote: Tue Aug 06, 2019 12:35 pm No penalty CD offers potential to get best of both worlds, maybe.

. . .

This really tips the balance for me - if your time frame is a year or two I don't think APY should be your top deciding factor, since they are so close - the difference in earned interest is pretty small. I would much rather factor in convenience and simplicity.
My approach would be to lock into an FDIC insured no penalty CD. We can all see the yield curve and where things are potentially headed. NP CD offers best of all worlds for OPs situation, downside rate protection, ability to get out penalty-free if rates climb again, and a good nights sleep.
engineerbme
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Re: high yield savings vs. no penalty CDs

Post by engineerbme »

i'd go with marcus' 13 month no penalty CD at 2.35% in your situation
MikeG62
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Re: high yield savings vs. no penalty CDs

Post by MikeG62 »

engineerbme wrote: Tue Aug 06, 2019 1:13 pm i'd go with marcus' 13 month no penalty CD at 2.35% in your situation
+1. I’ve been recommending NP CD’s in other active threads the last few days.

If you have enough cash you can mix in some traditional CD’s as well. I’ve been doing that too. In fact just opened another traditional 12-month CD at Ally (yield at 2.50%) this morning. I will initiate the process to fund it on Thursday when I have some Treasuries maturing in my account at Fidelity. Also plan to fund three more no-penalty CD’s (at Marcus) at the same time.

I’ve been opening CD’s and funding later as I’ve been worrying these rates aren’t going to last. So I’m getting in and locking the rate and funding within the grace period.
Last edited by MikeG62 on Tue Aug 06, 2019 1:57 pm, edited 1 time in total.
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anon_investor
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Re: high yield savings vs. no penalty CDs

Post by anon_investor »

No penalty CDs is the way to go. Best of both worlds.
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bholm83
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Re: high yield savings vs. no penalty CDs

Post by bholm83 »

Thanks everyone. I think I will go with Marcus’s 13 month no penalty cd. I’m thinking of putting $60K in a no penalty cd and the rest I will put in the popular direct savings account paying 2.5%. Going to have my paycheck direct deposited into the new savings (from schwab) and hope it stays around 2% this year at least. Schwab is only lying .4%. Not a great place to park cash :(

Any drawback in putting that much $ in one no penalty CD with marcus?
z91
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Re: high yield savings vs. no penalty CDs

Post by z91 »

Consider splitting up the CDs. I use Ally and their minimum was 25k, so I opened up a few at the minimum. This allows me to cash out 25k at a time in case I decide I need the cash for something like a car.

If I bought one big CD, then I'd lose the entire CD allocation. I'd have to open a new CD with the remaining funds, which may or may not have preferred rates.
dantheman46
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Re: high yield savings vs. no penalty CDs

Post by dantheman46 »

Another thing to consider is an add on CD. You could park your money at Popular Direct or another bank offering 2.5% and then if rates drop, you could add that money to an add on CD. This may not keep you as liquid as you might like depending on the length of the add on cd but add on CD's can definitely provide an insurance policy.
HockeyFan99
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Re: high yield savings vs. no penalty CDs

Post by HockeyFan99 »

z91 wrote: Tue Aug 06, 2019 6:17 pm Consider splitting up the CDs. I use Ally and their minimum was 25k, so I opened up a few at the minimum. This allows me to cash out 25k at a time in case I decide I need the cash for something like a car.

If I bought one big CD, then I'd lose the entire CD allocation. I'd have to open a new CD with the remaining funds, which may or may not have preferred rates.
+1

I posted this in another thread, but I called Marcus today and confirmed that you can open multiple no penalty CDs, to split up the money into chunks in case you want to pull some and not all. If you put it all in one CD then if you want to pull some out you have to close the whole CD.

You also cannot add on to the Marcus CDs after initial funding (unlike other explicit add on CDs).
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fortfun
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Re: high yield savings vs. no penalty CDs

Post by fortfun »

bholm83 wrote: Tue Aug 06, 2019 12:13 pm I opened a Wealthfront account, right before the fed rate cut and the the APY went from 2.5 to 2.32%. I'm considering opening an account with Popular Direct (currently 2.55%) to park $70,000 to save up for a house since they are now the leaders in APY but am wondering if savings accounts are the best place to park cash?

My question is, there are some no penalty CD rates that are over 2%, and some regular CD rates that are around 2.3%. Do you think it is a better idea to park my cash in a CD rather than a variable APY savings account? 2.55% is so enticing but I imagine that won't stay like that for long. I just prefer my cash to be a bit more liquid in case I buy in the next year or two, but with the fed rate cuts I'm wondering if savings is the best place to park cash anymore. Anyone have a crystal ball that can tell me what the fed will do to my APY in the next year? :)

Thanks for help!
I'd move it around to a bunch of different banks and collect $500 bonuses (on top of 2% interest). Marcus, Cap One, Simple, etc. You can probably make an extra couple of grand doing this within a year.
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bholm83
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Re: high yield savings vs. no penalty CDs

Post by bholm83 »

moving around to different banks for bonuses is a good idea, but I'm concerned it would be a pain to get the money out as I have heard some horror stories of people trying to withdraw their funds from some of these banks. What are your top 3 bonus checking/savings banks with high APY?
02nz
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Re: high yield savings vs. no penalty CDs

Post by 02nz »

bholm83 wrote: Tue Aug 06, 2019 11:29 pm moving around to different banks for bonuses is a good idea, but I'm concerned it would be a pain to get the money out as I have heard some horror stories of people trying to withdraw their funds from some of these banks. What are your top 3 bonus checking/savings banks with high APY?
Horror stories? Almost always user error. Link external account by ACH and transfer (you can pull from your other account or push from the savings account). I've done this at Discover, Capital One, Ally, Marcus (Goldman Sachs), Simple. Haven't had any issue getting money out of any of them.

Best current bonus is probably $250 for a "protected goal" (savings account) at Simple, but check doctorofcredit.com. Discover and Capital One run bonuses sometimes. Ally and Marcus have had promos where they gave you 1% of what you brought in as a bonus on top of interest. Citi sometimes has bonuses large enough to overcome their ridiculously low rates; same with Chase.
aristotelian
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Re: high yield savings vs. no penalty CDs

Post by aristotelian »

The only downside I have seen of no penalty CDs is that you have to keep the whole balance invested in order to receive the rate. If interest rates drop and you need to make a partial withdrawal you will lose the rate.
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Re: high yield savings vs. no penalty CDs

Post by MikeG62 »

aristotelian wrote: Wed Aug 07, 2019 12:08 am The only downside I have seen of no penalty CDs is that you have to keep the whole balance invested in order to receive the rate. If interest rates drop and you need to make a partial withdrawal you will lose the rate.
Yup, and the reason to open several NP CD's. This way if you need to break one you aren't blowing it up for the entire amount invested. I have ten of them between Ally and Marcus. All opened on the last 30 days.
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mindbogle
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Re: high yield savings vs. no penalty CDs

Post by mindbogle »

dantheman46 wrote: Tue Aug 06, 2019 6:32 pm Another thing to consider is an add on CD. You could park your money at Popular Direct or another bank offering 2.5% and then if rates drop, you could add that money to an add on CD. This may not keep you as liquid as you might like depending on the length of the add on cd but add on CD's can definitely provide an insurance policy.
I don't see an add-on CD product at Popular Direct. DepositAccounts doesn't indicate they sell these either. Maybe an option in the past but not available any longer?

MB
dantheman46
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Re: high yield savings vs. no penalty CDs

Post by dantheman46 »

Popular Direct doesn't have them but other institutions do. For example Bank5Connect has a 2 year Add on CD that pays 2.6%.
Topic Author
bholm83
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Re: high yield savings vs. no penalty CDs

Post by bholm83 »

So I have about 60K I want to put into no penalty CDs. I'm thinking 4 NP Cd's with Marcus and then having my paycheck go into a high yield savings account (like popular direct). I don't see an advantage in putting my income into Schwab checking anymore. I will leave some in Schwab (free ATM withdrawals) but their APY is .4% Kind of surprised it is so low, but I do like Schwab's customer service so not going to leave them. Plus, I have my Roth with Schwab.

It does confuse me why people would put their cash into regular CDs rather than NP CD's if the rates are the same. I assume, they just like the bank or want to consolidate everything with one bank?
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Re: high yield savings vs. no penalty CDs

Post by MikeG62 »

bholm83 wrote: Thu Aug 08, 2019 4:20 pm
It does confuse me why people would put their cash into regular CDs rather than NP CD's if the rates are the same. I assume, they just like the bank or want to consolidate everything with one bank?
But the rates are not the same. Ally and Marcus both offering 12-month traditional CD's at 2.50%. Ally no-penalty CD is currently at 2.30% for 11-month term and Marcus is at 2.35% for 13-month term.

I would not buy a traditional CD at Marcus as EWD penalty on 12-month CD is 270 days of interest (Ally is 60 days).
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bholm83
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Re: high yield savings vs. no penalty CDs

Post by bholm83 »

My bad. You're right. Not sure what I was thinking.

So If I understand the CD penalty for early withdrawal at Ally, If I were to put 60K into several regular CDs at Ally at 2.5% for 12 months, it would pay out $1,500 at maturity in a year, but if withdrawed the full amount anytime before that, I would pay $250 total (2 months worth of interest)? Actually doesn't seem like a bad deal.
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Re: high yield savings vs. no penalty CDs

Post by TLB »

Wells Fargo has a special rate 2.05% for a normal savings account this week. $25,000 minimum to $1m it has to be new money.
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Re: high yield savings vs. no penalty CDs

Post by MikeG62 »

bholm83 wrote: Thu Aug 08, 2019 4:42 pm My bad. You're right. Not sure what I was thinking.

So If I understand the CD penalty for early withdrawal at Ally, If I were to put 60K into several regular CDs at Ally at 2.5% for 12 months, it would pay out $1,500 at maturity in a year, but if withdrawed the full amount anytime before that, I would pay $250 total (2 months worth of interest)? Actually doesn't seem like a bad deal.
Yes that is correct.

You could buy down your risk by opening a bunch of CD's - say four at $15K each. This way if you have to break one the cost would be the return of 60 days interest or $62.50. Of course you may then have reinvestment risk on the portion of the $15K you did not need immediately and want to reinvest (say you needed $5K and not $15K). Not sure I would break up into a lot more CD's because the numbers would then be quite small.

You could also open some traditional CD's and one no-penalty CD too (especially if you think there is a fair chance you might need access to some of the money). Keep in mind that at 2.30% on the 11-month CD if you put all $60K into it you are only giving up $10 in interest per month (setting aside that one is 12-months and one is 11-months ). If you want to do one no-penalty keep remember you need to invest $25K to get the 2.30% rate at Ally. At Marcus you get the 2.35% even on a small balance.

So you have a number of options.
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bholm83
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Re: high yield savings vs. no penalty CDs

Post by bholm83 »

Appreciate the help! I'm leaning towards NP CD's with Marcus. I'm saving for a home, and the difference between 2.35% and 2.5% interest is really minimal in the grand scheme ($90 on 60K). I have a goal of saving around 150K total, (hopefully within the next year or two) for a down payment so at most I'll be losing out about $200 if I go with NP cd's rather than regular CD (ssuming rates stay the same, but even if not, the difference just isn't that large to justify purchasing regualar CDs in my opinion.
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Re: high yield savings vs. no penalty CDs

Post by HockeyFan99 »

That makes sense, and I think the NP CDs are actually even better than just the minimal difference in interest.

While it's true that you can break them if you need the money, I think the more important value is in the optionality that they provide in the event that interest rates do something really unexpected. Yes it certainly seems like we are heading into a declining rate environment (but what do I know, that's just what I read other people predict), but what if that is wrong? What if in six months the Fed has raised rates twice and interest rates have spiked?

The small amount in lost interest that you forego grants you the option to pivot quickly in the event something unexpected happens and, while unlikely, that seems more valuable to me.

What's just gravy is that, somehow, the NP CDs at Marcus carry a 13 month term. If it really is a declining environment that extra month at 2.35% may make you back a good chunk of what you give up by foregoing the 2.5% for 12 months, depending on how far interest rates fall and what your options are a year from now.

tl;dnr: the 13 month NP CDs from Marcus at 2.35% seem like a pretty good deal to me if parking emergency fund or near-term needed cash.
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MikeG62
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Re: high yield savings vs. no penalty CDs

Post by MikeG62 »

Well it finally happened, both Ally and Marcus dropped the rate overnight on their no-penalty CD's.

Ally dropped from 2.3% to 2.2% (same minimum opening deposit of $25K and same 11-month term), while Marcus had a slightly bigger change dropping the rate on their 13-month CD by 20bps (from 2.35% to 2.15%). Having said this, Marcus added two other variations on their no-penalty CD: an 11-month at 2.20% and 7-month at 2.25%.

Thankfully I have locked in one more NP CD two days ago and will fund next Thursday (within the grace period) when proceeds from a maturing Treasury will hit my brokerage account.

BTW, Marcus also dropped the rate on their 12-month traditional CD from 2.50% to 2.40%. Ally is still at 2.50% on their traditional 12-month CD. As I have said before, the steep EWD penalty at Marcus (270 days interest) would prevent me from opening a 12-month CD with them anyway, but the rate reduction should be noted.

Surprisingly, Marcus online savings account still at 2.15%, but got to wonder for how much longer.
Last edited by MikeG62 on Fri Aug 09, 2019 8:29 pm, edited 2 times in total.
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HockeyFan99
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Re: high yield savings vs. no penalty CDs

Post by HockeyFan99 »

Thanks for the update.
MikeG62 wrote: Fri Aug 09, 2019 5:54 am while Marcus had a bigger change - not only dropping their rate by 10bps from 2.35% to 2.25% - but more importantly reducing the term of their NP CD from 13-months to 7-months.
It always seemed a bit odd that the NP had a longer term.
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Topic Author
bholm83
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Re: high yield savings vs. no penalty CDs

Post by bholm83 »

Ouch. Was going to open some NP CDs with Marcus this week. I might just go with popuar directs savings account that is currently 2.55%. I realize it won't stay like this for long, but anything above 2% is a good place to park my money I think.

I'm thinking popular direct may keep a higher interest rate because they have fees associated with their savings ($4/month if your account drops below $500) and high opening requirements ($5000). I'm thinking this may allow them to keep their APR a little higher? Regardless, I probably would mix in some NP Cd's with a high APY savings like popular direct.
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