Archives for July 4, 2019

It’s getting harder to generate a good return on your cash.

An analysis of Federal Deposit Insurance Corp. data by behavioral economics consulting firm Analyticom found that rates for certificates of deposits (CDs) are falling across the board for the first time in five years.

Long-term CD rates began falling in January, Analyticom founder Dan Geller said. “Institutions started lowering their rates on deposits gradually, but July is a turning point because this is the first month that all CD terms are trending down,” he said.

Per Analyticom’s report, the average rate on a 12-month CD is expected to be 0.67%, down from a recent peak of 0.70% in May.

In the past weeks, multiple online banks, which have long offered competitive rates on their savings account products, have begun to lower those yields.

Marcus, the online division of Goldman Sachs GS, +0.03% said that it has lowered the annual percentage yield (APY) on its savings accounts to 2.15% from 2.25%.

Similarly, Ally Bank confirmed ALLY, +0.80% it has dropped the APY on its online savings account to 2.10% from 2.20%.

Pasadena, Calif.-based CIT Bank CIT, +1.20% has cut the APY on its Savings Builder accounts to 2.30%; the bank previously offered an APY of 2.45% on these accounts, according to Reddit users. (CIT confirmed that it decreased the APY, but didn’t provide the previous rate.)

Savers still can take advantage of strong CD rates

While CD rates are falling on average, good opportunities still exist — especially at smaller financial institutions.

“Banks and credit unions, especially smaller ones, have a lag in setting rates, so you can sometimes get a few weeks or even months after Treasury rates come down to lock in a rate with a CD before it falls in tandem,” Karimzad said.

Particularly for those who are risk-averse, such as retirees on a fixed income, this could be an ideal time to lock in a strong interest rate on cash, Geller argued, as banks could bring CD yields down even further if the Federal Reserve moves forward with a rate cut later this year as it has teased is possible.

Ultimately, there’s risk involved in locking in a CD rate. “Bond markets are saying there’s a strong chance growth and inflation will be slower two years from now, and it’s not convinced when that will accelerate afterward,” Karimzad said.

“That said,” he said, “bond markets can be wrong and, if so, those rates will rise again.”

Why banks are cutting interest rates on savings accounts and CDs
The last time CD rates trended downward in this manner was in mid-2007, right before the start of the Great Recession. However, Geller warned that the current yield-cutting is not a signal of an upcoming recession.

Instead, banks are looking to secure their bottom lines. Interest rates are also falling for loan products, which generates income for banks. As a result, banks don’t want to get stuck paying out high yields on deposit and savings accounts if they’re not earning as much.

“The reason we are seeing declining deposit rates has more to do now with hedging against Fed rate cuts in order to protect net interest margins down the road,” Geller said, referring to the important metric used to determine whether banks are turning a profit.

“Banks are catching up to the bond market with rates, which has been pricing in lower expectations for growth and inflation,” said Brian Karimzad, co-founder of personal finance website MagnifyMoney TREE, +2.56%

The yields on Treasury bonds TMUBMUSD10Y, -1.26% have skewed lowered throughout 2019 — this is an important benchmark for the interest rates banks charge on loans and pay out on deposits and savings.

“Banks are catching up to the bond market with rates, which has been pricing in lower expectations for growth and inflation,” said Brian Karimzad, co-founder of personal finance website MagnifyMoney TREE, +2.56%

“Interest rates are on the downswing and are projected to fall further,” a spokesman for Ally said. “These market conditions impact all kinds of things, from mortgages to CDs to savings accounts.”

A spokesman for Goldman Sachs also cited “market conditions” as an explanation behind Marcus’ APY cut, while a spokeswoman for CIT said the company considers “a number of marketplace factors.”

Consumers can still find high APYs at some institutions
Not all companies are slashing rates — and some have even boosted the yield on their savings accounts in recent weeks.

Robo adviser investment firm Wealthfront recently boosted the APY on its FDIC-insured cash accounts to 2.57%, which was the highest interest rate available on the market as of the end of June according to personal-finance site Bankrate.

When Wealthfront debuted these accounts earlier this year, they only carried a yield of 2.24%. The Wealthfront accounts only require $1 to open and carry no fees.

Wealthfront says it manages to keep the interest rate on its cash accounts higher than most other banks’ savings accounts because it automates its back-end processes.

“Wealthfront’s repeated APY increases are not an accident, fluke, or temporary gimmick — this is how we built this part of our business to function,” Andy Rachleff, Wealthfront’s co-founder, wrote in a blog post. “Our cash team is relentless at driving down our cost through automation. Each time we are able to cut our costs, we try to pass along those cost savings to our clients.”

The robo adviser does warn that it could be forced to lower rates in the future if the Fed does choose to cut rates, but argues that it expects to still offer a higher yield than the industry average.

Meanwhile, Vio Bank and Salem Five Direct have raised the APYs on their online savings accounts — to 2.51% and 2.51% respectively, per Bankrate — in the past month. (Vio and Salem Five did not immediately return requests for comment.)

At institutions like Ally and Marcus, savers are still coming out ahead these days, relative to what they could earn on their funds in the past.

“Even with a rate cut from the Fed, savers in online savings accounts will continue to earn a return that exceeds inflation,” Bankrate’s chief financial analyst Greg McBride said. “The Fed raised rates nine times in a three-year period. If they walk back one or two of those, savers are still far ahead of where they were for much of the past decade.”

Indeed, the average rate on savings accounts nationwide was 0.10% as of July 1, according to the FDIC.

A lot of personal finance advice gets caught up in the little things—the cup of coffee you buy in the morning for $3. The streaming music subscription for $9.99 per month. Cut out these small expenses and clutch those dollar bills and you’ll save thousands of dollars each year. But of course it’s not that easy.

Even if you cut back on your expenses, it still takes a lot of mental fortitude to put that saved money in a safe place where it won’t get used on … other expenses. Sometimes, you need help to make strides managing your money. Savings apps can help you automate your savings and make small transfers out of your checking account so you don’t have to think about (and sometimes resist) the actions it takes to save.

These apps aren’t always free. But before you tsk-tsk at the ones that charge a fee, hear me out on why paying to save can be worth the cost.

This past December, I signed up for a free trial of Digit. The app evaluates your income, bills and spending to calculate how much cash you can save each day. It makes a withdrawal from your checking account holds it, letting your daily savings accrue until you want to move it back to one of your accounts.

Halfway through 2019, I can’t imagine my life without it—$2.99 per month be damned.

Why it’s worth paying for a savings app (sometimes)

Isn’t it counterintuitive to pay money to save money? Some of you are probably asking. You’re not alone: That’s why Digit’s shift from a free money-saving app to a paid one in 2017 sent a lot of users looking for other options.

But the thing that matters is that you value what you’re paying for. You Need a Budget costs $6.99 per month. Why do people pay for it when they could make their own spreadsheet or sign up for a free budget app like Mint? Because the cost is worth it to help achieve your goal.

If you have limited cash flow and are trying to make ends meet each month with little to spare, paying for a savings app probably doesn’t make sense for you. You’re better off grabbing the extra $3 or $5 left in your pocket and saving it yourself until you’re on better financial footing. But if you’re feeling comfortable with the budget you’ve already established and want to accelerate your savings—even beyond the “pay yourself first” mentality many of us use when we automate savings transfers—paying for an app to help you do that is likely to have benefits that outshine the monthly fee.

In my case, the goal is to save more of what’s in my checking account and stash away as much as possible. I have that problem where after I pay my bills and my automated savings transfers are tucked away, my checking balance looks like a playground. Digit doesn’t send me alerts to tell me what it’s saving each day, which usually leaves me pleasantly surprised when I check the app. It adds another layer of saving that is out of sight and out of mind but doesn’t make me feel like I need to eat cereal every day in order to save money.

I had no idea I saved this much

Part of Digit’s allure is that I have no idea how it really works. All I know is that since December, I’ve withdrawn $3,524. That’s $3,524 of my own money on top of my monthly auto-transfers to savings that I’ve been able to take from this dedicated, algorithmic place and put it toward whatever I choose.

If I saw an extra $500 per month floating around in my checking account, do you think I would get excited about putting it into savings? Probably not. I’d probably want to book a hotel room for a long weekend at the beach. All I have to do with Digit is set a low-balance protection level to tell Digit not to save if my connected checking account hits a particular amount. Beyond that, it makes better decisions about my money than I do.

Researchers tell us that most people would be better off waiting to claim Social Security Opens a New Window. benefits. Yet most people file early Opens a New Window. .

More than half apply for Social Security before they reach full retirement Opens a New Window. age, which is currently 66 and rising to 67 for people born in 1960 and later. More than 30% apply as soon as they can — at age 62. Only about one in 25 applicants waits until age 70, when monthly benefits max out.

Some people have little choice, of course. They may have no savings and no job. Others have better options than applying early, but don’t realize it.

That’s due in part to the many, many myths surrounding Social Security— and people’s tendency to think they know more about this program than they actually do. A 2013 survey by Financial Engines found that 77% of pre-retirees felt confident about their Social Security knowledge, but 95% could not correctly answer eight questions about how the program works.

Here are the myths most likely to cost you money:

1. ‘It doesn’t matter when I take Social Security’

Social Security benefits increase by about 7% each year between 62 and your full retirement age, and by 8% each year between full retirement age and 70. This actuarial adjustment aims to ensure that people who opt for larger checks for a shorter period don’t get less than those who get smaller checks for longer periods.

But longer life expectancies, current low interest rates and rules regarding survivor benefits mean that most people are better off delaying, says researcher Sita Slavov, a professor of public policy at George Mason University in Arlington, Virginia, and a faculty research fellow at the National Bureau of Economic Research.

Social Security also provides insurance against longevity. People who live longer than expected can run out of savings and wind up depending mostly or even entirely on Social Security. That alone is a good reason for most people to delay their applications.

2. ‘If I have a shorter-than-average life expectancy, I should claim benefits early’

Most people underestimate how long they are likely to live, according to the Stanford Center on Longevity. A 65-year-old man today can expect to live to 84, according to the Social Security Administration. A 65-year-old woman can expect to live to 86.5. Couples who are 65 today stand a 50% chance of having one spouse live to 92, according to the Society of Actuaries. Life expectancies are even longer for those now in their mid-50s. One in two women and one in three men will live past 90, the actuaries say.

Even if you’re right about having a shorter life expectancy, though, claiming early could shortchange your mate. Married couples will lose one of their checks when the first spouse dies, which can cause a serious drop in income. The survivor will get the larger of the two checks the couple was receiving. That gives the higher earner in a couple — the one whose check will be the largest — a strong incentive to delay so that the survivor’s benefit is larger.

3. ‘If I claim benefits early and invest them, I’ll come out ahead’

No investment offers a guaranteed return as high as what you can get from delaying your Social Security application. To match that return, you’d have to take a lot of risk. Even the most prudent investor can get shellacked by a bear market or real estate downturn.

4. ‘I have to claim Social Security as soon as I quit working’

You don’t have to start Social Security when you stop working, or vice versa. Financial planners often suggest people tap their retirement funds or other savings if that allows them to delay their applications.

Also, you don’t have to wait until 70 to get substantial returns. Delaying four years, from 62 to 66, can translate into a 33% sustainable, annual increase in your standard of living, Slavov says.

5. ‘I need to apply before Social Security goes bankrupt’

Social Security is not “going bankrupt.” If Congress doesn’t act, in 2035 the system will be able to pay only about 80% of promised benefits — and 80% clearly is not the same as zero. If and when Congress does get around to fixing Social Security, the changes are likely to affect people further from retirement. “Locking in” your benefit early just means settling for smaller checks for life.

How much did you know about investing when you were thirteen?

About 30% of adults under the age of 45 have a relatively low level of financial literacy, according to a survey conducted by the TIAA Institute.

Tim Sheehan, CEO and co-founder of family finance app Greenlight, joined Yahoo Finance’s the Final Round to discuss gaps in adults’ money knowledge and how personal finance apps like Greenlight are helping parents pass on better knowledge.

“Adults aren’t even aware of some of the gaps in their [financial] knowledge,” said Tim Sheehan, CEO and co-founder of Greenlight, in an interview with The Final Round. “All of the parents that we’ve talked to know that they want their kids to be smart about money, even if they don’t know everything on the personal finance spectrum — they know that they want their kids to be savvy about it.”

Sheehan said adults can have gaps in their knowledge about spending wisely, saving, investing, and establishing credit.

Sheehan said the Greenlight app and debit card, part of a growing market of family personal finance products, help families get serious about personal finance. With the app, parents can monitor their child’s spending, individually approve their purchases, and set savings goals. Sheehan said Greenlight helps parents encourage their children to develop healthy financial habits early in life to build a foundation to a stable financial future once they’re adults.

“By using Greenlight, kids start to learn things like making trade-off decisions,” Sheehan said. “Should I hold off on buying this thing, even though I really want to get it for instant gratification, and save my money for something better down the road?”

Greenlight is not without competitors: products like Goalsetter, which boasts a similar business model, encourage families to grow their savings alongside one another. But Sheehan doesn’t feel threatened by the swelling of the personal finance space.

“Some people are approaching it in different ways,” he explains. “We’re trying to look at the whole personal finance spectrum, and help kids learn as they go.”