Tuesday, February 24, 2009

Plunging APYs, the Soundness of My Banks and Other Musings About Savings

Wow. It's only been 18 days since my last post about my shrinking savings interest yield and I now have to update again.

  • Dollar Savings Direct's APY went from 3.2% to now 2.65%
  • Citibank USA's APY went from 2.4% to now 2.3%
  • ING's recently decreased from 2.2% to 1.85%
I guess the bright side is that all of my savings accounts are in line with each other in terms of APY yields. As we've learned with Madoff and the Stanford Financial Group, if your investment vehicles are yielding far above everyone else, you better start sniffing around for something fishy. I guess my banks all pass this initial "sniff" test.

But I think it's also worth taking a gander at how financially safe my banks are. Here is my prior post which cites the excellent LA Times article on how to determine your bank's financial health.

Here are the results:

DollarSavingsDirect (Online Branch of Emigrant Bank)

    Bankrate.Com's Safe & Sound Rating: 1 Star
    Bankrate believes that, as of September 30, 2008, this thrift exhibited a significantly below average condition, characterized by substantially lower than normal overall, sustainable profitability, very questionable asset quality, below standard capitalization, and near normal liquidity.

    Bauer Financial's Star Rating: 2 Stars
    (Bauer charges $10 for its analysis report. No other commentary provided.)

Citibank Ultimate Savings(Online Branch of Citibank, N.A.)

    Bankrate.Com's Safe & Sound Rating: 3 Stars (Definition: "Performing") - Sthinky's Comment: This shocks me to no end!
    Bankrate believes that, as of September 30, 2008, this bank exhibited a generally satisfactory condition, characterized by substantially lower than normal overall, sustainable profitability, satisfactory asset quality, mid-range capitalization and seemingly ample liquidity.

    Bauer Financial's Star Rating: 3 Stars
    No other commentary provided.

ING Direct(Online Branch of ING Bank, FSB)
    Bankrate.Com's Safe & Sound Rating: 4 Stars (Definition: Sound)
    Bankrate believes that, as of September 30, 2008, this thrift exhibited a sound condition, characterized by approximately normal overall, sustainable profitability, good asset quality, mid-range capitalization, and lower than normal liquidity.

    Bauer Financial's Star Rating: 3½ Stars
    No other commentary provided.


I guess it makes sense that the bank that's in the most shaky condition would offer the highest APY, since it wants to attract as many deposits as it can to stay afloat. The good news is that all of my banks are all FDIC members and I'm not in danger of losing any of my savings.

The majority of my savings is currently with DollarSavingsDirect since it was the account with the highest APY. Although it's still higher than the rest, it no longer makes sense for me to keep most of eggs in that one basket. Perhaps I should consider distributing my savings more equally between all 3 accounts.

I'm also considering creating a CD ladder. A CD ladder is the staggering of CDs at different interest rates and maturities. Similar to dollar cost averaging, I can smooth out the volatility of rising/decreasing interest rates over time by staggering.

But I'll need to be cognizant of 3 types of risks with CDs, though:
    Default risk: There is very little chance of default on CD's IF the CDs are FDIC insured. So, if my bank is domiciled in Antigua and is giving me a 7% return with no FDIC insurance, I need to be wary! Oh, and I guess I need to make sure I don't exceed the FDIC limit at any one bank. (Ha ha.)

    Market risk: If I decide to liquidate my CD prior to maturity, I will be subject to whatever price the market will bear. This can be lower than my original investment depending primarily on interest rate movements since purchase date.

    Call Risk: Callable CD's will typically pay a higher interest rate compared to a non-callable CD with the same maturity. This is because the issuer retains the right to call back the CD at specified future dates. But even if I don't have a callable CD, my rates can can be slashed if my bank is taken over by another bank that is not obligated to continue honoring the rate. So... if I'm investing in a CD, I'm better off sticking with a more sound bank that's offering a slightly lower APY than a shaky bank offering a rocking APY. Got it!

Since I need most of my money as liquid as possible, I'll probably start small ($500) and infrequently (once a year). Hopefully, as I pay off my debt and more money frees up, I'll up the amount and frequency of my CD ladder.


Ms. MoneyChat said...

hey shtinky, why do you have 3 different savings (i'm just being nosey here).

like you, i too am shocked at citibank's rating. this market is teaching me that there is really no such thing as an "expert" opinion. the rating agencies, analysts, and other market soothsayers have just as much of a clue as you and i do.

Sharon Rose said...

Hi there-wow, you are really clued up on all of this, good for you. Hope you do well on your savings journey my dear, it will be great to see these amounts grow and grow!

paranoidasteroid said...

I was actually thinking about opening some more CDs now that ING dropped their rate again. One bank is offering 2.6% on a 6-month CD, but maybe I'll check them out on Bankrate before I commit to anything.

Thanks for prompting me to actually get to work on this!

frugalCPA said...

Good to see that ING is in fine condition. No rush on the bank necessary.

Miss M said...

FNBO dropped today to 2.4%, bummer. They are usually rated very soundly, they've offered above average rates for years. I looked at CD's briefly and the rates right now are awful. Wish I locked in more last year at 4.25%!

K-money said...

There was an article in the paper recently about a 90yr old who went back to work as a grocery store greeter because he lost all his money in one of those Madoff schemes. He put all his money with Madoff and mortgaged his paid-for house to add to the investment. It is a little harder to feel sorry for someone who should have been comfortable but lost it all because of greed, even if he is 90. I'm all for safer investing when closer to retirement, these kind of stock market drop-offs seem to happen every several years and I'd prefer they not happen to me when I am older.

I put my EF in a CD ladder with 6 month CDs. Every other month a month's worth of living expenses are available (goal is to have 6 CDs eventually) and I keep one month's expenses in cash. The 6 month CD rates aren't great but the are better than savings account rates.