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.

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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.