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David Bach The Automatic Millionaire

David Bach, The Automatic Millionaire

Five Ways to Get the Best Rates for Your Money

by David Bach

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Posted on Monday, February 11, 2008, 12:00AM

Two weeks ago, Federal Reserve chairman Ben Bernanke moved to lower short-term interest rates by 50 basis points. That was on top of the historic move 10 days earlier when, in an unscheduled emergency meeting, he lowered the federal funds rate 75 basis points.

The good news is that these federal rate cuts help the stock market and borrowers in the short term. The bad news is the decreased interest rates we're now getting on our savings accounts.

Downward Spiral

In the last two years, money market accounts and online savings accounts have had nice returns, often over 5 percent. Until last week, my personal savings account was earning 5 percent and my business savings account was earning 4.75 percent (it was over 5 percent six months ago).

After Bernanke's move, my personal savings rate dropped to 3 percent and my business savings dropped to 2.75 percent. That's huge.

How to make up the loss? Here's what I'm doing, and I suggest you do the same:

1. Find out what the rate on your accounts has adjusted down to.

Don't assume that the rates on your checking, savings, and money market accounts hasn't changed. My banker called me proactively (thank you, Bryan), but chances are your banker didn't. So call your bank or brokerage firm today and find out what your rate is, and ask if it's going to go lower. (Chances are that it is.)

In addition, check and see if the bank is offering a teaser rate for new customers or new accounts, and see if you can open one to get this rate.

2. Go online and shop for a rate.

If you're banking with a local bank and they're not willing to compete for your money by offering you a decent rate on your savings, go to an online bank. Start by searching at iMoneyNet or Bankrate.com. Bankrate breaks down the rates offered by various institutions here.

Also check out EmigrantDirect. They've consistently offered some of the highest interest rates online in the last two years. Their primary competitor, ING DIRECT, is worth looking into, too. Also remember that many of the national banks are now offering online savings accounts, so check to see if your current bank is offering an online alternative and, if so, how much more they're paying in interest (it may be worth switching).

3. Look at CDs as an option to money markets.

Go to Bankaholic.com to compare certificate of deposit (CD) rates. I love this site because it also shows you special offers and features customer reviews. There are currently some special-promotion CDs that are close to 5 percent.

These are promotional offers, and many expire in days, but I'm sure there are more to come. The secret is to stay on top of the special offers and keep track of their terms -- many will require a minimum investment and others will only allow a maximum investment, so read the fine print.

4. Look at short-term corporate bonds and municipal bonds.

If you have a financial advisor, ask what he or she can offer you in terms of short-term corporate or municipal paper. I have an entire portfolio built of short-term paper that's averaging close to 4.8 percent right now. The paper I own is called Municipal Auction Rate Securities, or MARS.

The average duration of these bonds is between 20 and 30 years, but the paper has an interest rate feature that typically resets between 7, 28, 35, or 180 days. Because they reset with such short-term provisions, they typically trade in a manner similar to short-term debt. They're also backed by municipal bond insurance, and most of my bonds are federal-tax exempt. The minimum investment usually required for these types of bonds is $25,000, but you can sometimes find them in increments as little as $5,000.

5. Look at short-term bond funds.

I personally don't invest in these because I hate the risk involved. Short-term bond funds invest short-term bonds, and if rates go higher the bond values drop. On the other hand, if rates go lower -- and they probably will for a while -- the bond values rise.

Typically, the average duration of a bond in a short-term bond fund is a few years or less, so I would consider one only if I didn't need the money for 18 months or so. But again, my personal preference is a guaranteed investment.

Risky Business

People who own their own businesses should find out what their company's checking and savings accounts earn, too. Amazingly, many businesspeople overlook the interest on their business accounts -- I know, because this has been a topic of conversation for me and my business friends over the past two weeks.

Not one of them has shopped their rate yet, and in fact most couldn't even tell me what their business accounts were paying before the rate cut. Even worse, many admitted that they aren't earning money on their business accounts at all.

It's time for them -- and the rest of us -- to get shopping, because the Fed just took away our easy money.

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57 Comments

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  • Yahoo! Finance User - Monday, February 18, 2008, 5:29PM ET  Report Abuse

    • Overall: 1/5

    MARS = Auction rate securities. Clearly this guy is not following the on-going impact of the subprime mortgage problems and the spreading impact to other securities. This is very poor advice.

  • Yahoo! Finance User - Sunday, February 17, 2008, 11:14PM ET  Report Abuse

    • Overall: 1/5

    Buy Corporate bonds and muni bonds?? Does this guy even know what's going on? Horrible advice from a supposed expert.

  • Yahoo! Finance User - Sunday, February 17, 2008, 5:53PM ET  Report Abuse

    • Overall: 2/5

    Here's an idea. How about paying your debts off first (credit cards, student loans, mortgage). Whenever you pay off debt you "bank" a guaranteed rate of return which is, in almost all cases, going to be higher than what you'd get from any of the "investments" that David mentioned.

  • Yahoo! Finance User - Sunday, February 17, 2008, 2:29PM ET  Report Abuse

    • Overall: 1/5

    David, Have you seen the results of last week's MARS acution's. They are failing. Did you loo into this? Probably not. These investments are becoming illiquid and the bond insurers are failing. Your recommendation is almost irreseponsible. If these MARS keep paying 20% interest like the Port Authority of NY/NJ...you very well could be forced to take an outright bond with a predetermined coupon..however the bond won't be issued at pat but rather 90 to give it a long-term yield. Needless to say..."what you own" almost sounds pompous and in this case....undeniably illiquid.

  • Yahoo! Finance User - Friday, February 15, 2008, 12:56PM ET  Report Abuse

    • Overall: 4/5

    He mentioned a specific website that has CDs paying close to 5%. That would be more than 3 or 4%.

  • Yahoo! Finance User - Friday, February 15, 2008, 11:04AM ET  Report Abuse

    • Overall: 2/5

    I lucked out because I put about 45% of my savings in CD's before rates took a dump; However, I wouldn't recommend CD's now. I would take the advantages of lower prime rates, like refinancing and consolidate debts to a lower rate (for you people with debts).

  • Yahoo! Finance User - Friday, February 15, 2008, 1:56AM ET  Report Abuse

    • Overall: 1/5

    After today's (2/14/08) fall in auction muni's I say forget buying any of them

  • Yahoo! Finance User - Friday, February 15, 2008, 12:56AM ET  Report Abuse

    • Overall: 1/5

    Why would he recommend CD's that is ridiculous liquid variable rate products are exceeding in this unstable market. You can get 4% on a the right money market acct. CD's are typically 3% or less right now. I do agree with that short term bonds would make a good medium to channel your funds.

  • Yahoo! Finance User - Thursday, February 14, 2008, 6:41PM ET  Report Abuse

    • Overall: 1/5

    BACH ABSOLUTELY IS A CON ARTIST AND FRAUD -- HE HAS NO CREDIBILITY!! He pitches EmigrantDirect.com as a source for high rates (which was news to me) -- but fails to disclose that the company is a MAJOR ADVERTISER on his "get rich quick" website. (Check it out yourself.) Totally unethical -- he's promoting a company and accepts kick-backs in the form of ad revenue!!

  • Yahoo! Finance User - Thursday, February 14, 2008, 12:47PM ET  Report Abuse

    • Overall: 1/5

    To the post on Wednesday, February 13, 2008, 3:18PM ET - you are a fool. "FDIC works, I've been paid by them." Wake up moron. That was one tiny bank. Let's see how the FDIC handles funding BAC, C, WM, etc. This is the biggest credit crisis in the history of the world. Bach is a con artist idiot with NO financial knowledge whatsoever. In fact, you could get better advice from a 10th grader. All I have to say is that the reviewers who have posted bad reviews of this article are up to speed with teh current risks, while those giving it high ratings and/or saying the info is good or excellent have to be kids. You clueless idiots wake up.

  • Yahoo! Finance User - Thursday, February 14, 2008, 2:20AM ET  Report Abuse

    • Overall: 1/5

    Wow, this article offers up five ways you can set yourself up to lose your cash (as well as your home equity and your 401k!) Get me rewrite! Point-by-point: 1) It was exactly this sort of yield chasing that got us into the damn subprime bubble. WE ARE NOW IN THE BIGGEST CREDIT CRISIS IN DECADES, FOLKS. You want your cash to be SAFE. It's your other investments that should earn you a decent (long-term?) rate of return. Unless you have millions in cash (why?) and/or are willing to risk your hard-earned cash just to get bragging rights with your business buddies, then the temporary loss of 1-2% yield on your cash stash won't hurt you much (as several folks already pointed out). 2) The online rates tell you which banks are nearly insolvent, and desperate for your money - not which ones are the best places to put your money. You want to put your money in a bank that DOES NOT NEED it. A mid-tier rate at a highly regarded bank whose stock hasn't cratered lately is likely to be a much wiser choice right now. 3) With the high-yield CDs from the deeply troubled banks, you might get your cash back (even if only from the FDIC, eventually) but you might not get that promised 5%, since the bank could go belly-up within the next 6 months. Worse: if this crisis gets further out of control (and it hasn't been controlled yet, note!) the FDIC may be overwhelmed... The U.S. banking system's net free-or-borrowed reserves are currently NEGATIVE (all borrowed from the FED, see http://www.federalreserve.gov/releases/h3/Current/ ). We haven't even had all the writedowns yet. The government and banks are all clearly in "delay the pain" mode. There's a large risk of "loss of containment", which I think Charlie Munger (Buffett's key partner) would aptly describe as "lollapalooza effects". So things could very well get worse before they get better. If multiple banks blow up in rapid succession the FDIC will be overwhelmed and your cash will, at best, be in limbo for a while. Don't put all your eggs in that basket! 4) MARS are not safe; a previous poster pointed out that the auction process is rickety. (Think about those subprime CDOs just before the market froze up last summer.). Also, if rates go up, these bonds lose value just like the bond funds! There's a REASON why these things are offering higher yields (4.8 percent tax-exempt is junk-bond territory) right now: RISK, RISK, RISK... 5) Short term bond funds are not necessarily safe either. If the credit crunch fails to stay "contained" for much longer, all sorts of bonds (and preferred stocks for that matter) could default and/or have their risks reassessed in a way that resets their value downward - costing you principal. (Even in treasury funds - take a quick look at the bubbles forming in SHY and IEF. You want to jump off the top of that cliff?) Really short term bond funds like BIL and SHV look safer, since they are truly short term funds and all in treasuries. But folks, there's no free lunch out there right now - and a lot of debt-ridden sharks who want your cash, fast. If you want to beat the low-risk Treasury yields, you're going to have take on some real risks. And this is perhaps the riskiest credit environment anyone under age 75 has lived through! In times like these, return *of* principal is far more important than return *on* principal. We've all heard about diversifying our stock portfolios. Now is the time to diversify your cash as well! Treasury and muni money market funds and lower-yield FDIC-insured accounts at the more solvent banks might not get you bragging rights, but they'll get you more sleep at night. P.S.) Speaking of sharks, the kind soul who recommended EANAX sort of failed to mention that it's not a money market fund (it's a long-term muni fund) and it lost over 8% in the past 12 months. The yield might be high because a lot of municipalities are in deep financial trouble (falling property tax revenues, anyone?)

  • Yahoo! Finance User - Wednesday, February 13, 2008, 6:01PM ET  Report Abuse

    • Overall: 3/5

    This is good basic advice, but I did not see any comments as to how principal and interest are calculated. I always look for continuous compounding.Principal earns interest and becomes part of principal and recalulated daily.Some banks may not do this.Very important feature.Ck money mkt accounts

  • Yahoo! Finance User - Wednesday, February 13, 2008, 3:18PM ET  Report Abuse

    • Overall: 4/5

    To 5:04 on 2/12 commenter: have you ever been through an FDIC payout? I have - Net Bank. The bank failed on Friday - my accounts were fully available on Monday. FDIC works, and it works fast. Countrywide is paying much better savings rates (4.75% today) than ING Direct or EmigrantDirect. I suggest that Bach move his money there - poor research. However, in general much of this advice is excellent. Online banks will, typically, give you a much better rate than B&M - though that is changing.

  • Yahoo! Finance User - Wednesday, February 13, 2008, 10:21AM ET  Report Abuse

    • Overall: 1/5

    Inflation will eat your interest alive. CD is a guarantee lose choice.

  • Yahoo! Finance User - Wednesday, February 13, 2008, 9:55AM ET  Report Abuse

    • Overall: 2/5

    Hmmm! I only counted FOUR!

  • Yahoo! Finance User - Wednesday, February 13, 2008, 9:48AM ET  Report Abuse

    • Overall: 1/5

    This equates to rate shopping with no consideration for liquidity or risk. ie move money to where ever I can get my desired rate of return. Sorta like saying I have $10 for lunch, and getting the $1 special at McDonalds. Tough times an inflation may require you to brown bag it, but it doesnt require you to eat poorly an without taste. A well balanced portfolio is always a good thing, much like a well balanced meal. Addtionally a .25% rate benefit equates to $25 annually on $10,000. So how many hours are you willing to invest for $25?

  • Yahoo! Finance User - Tuesday, February 12, 2008, 9:53PM ET  Report Abuse

    • Overall: 3/5

    Remember, most of the time this is short term cash. It's money that you'll need next week or next month. That's why it has a low return. Let's not get greedy with money we may need immediately. If you want larger returns legitimately, you'll have to buy CDs or MM funds or stocks. Short term money is not supposed to have a large return on investment.

  • Yahoo! Finance User - Tuesday, February 12, 2008, 7:59PM ET  Report Abuse

    • Overall: 5/5

    Good article. Most people need to keep some money on the side lines for emergencies and for opportunities. These accounts offer higher rates and most are FDIC insured.

  • Yahoo! Finance User - Tuesday, February 12, 2008, 5:04PM ET  Report Abuse

    • Overall: 1/5

    Hey idiots..wake up. If the Fed funds rate is lower than what some banks are offering for savings accounts AND if savings accounts are payng higher than CDs, what does that tell you? Do any of you have a basic understanding of finance? Well all know Bach doesn't. Look, banks that are offering higher rates than the Fed funds rate are desperate for cash. What that means is they are in trouble. And if you think your savings are safe with these banks you had better think again. The FDIC isn't going to be sending you a check the day after these banks fail. If you are lucky you might getyour money back in a few years. The fact is if you are putting your money in a bank that is paying higher than the Fed rate, you are taking excessive risk. This is basic finance. Does itmake sense to you that a savings account that is almost fully liquid (most banks allow a few withdrawls per month and you can withdrawl at any time) would pay a higher interest rate than a 6-month or even 1-year CD? CDs are NOT liquid. If you don't understand, I suggest you just put your money under your mattress. Fools are always better staying away from things they don't understand. Bach is an idiot loser. Look at him. You can tell he's a con man.

  • Yahoo! Finance User - Tuesday, February 12, 2008, 4:58PM ET  Report Abuse

    • Overall: 1/5

    He is starting to sound like P. Trunk - I saw her article recently in a local throaway rag. A fitting place for both. With inflation running around 10%, it's a waste of time trying to get additional 0.5% on your savings. Money kept in savings accounts or CDs should be treated the same as cash - a temporary state, before it's invested somewhere else - hard assets come to mind, given that there seems to be no end to Fed's willingness to print more money all the time.

  • Yahoo! Finance User - Tuesday, February 12, 2008, 4:43PM ET  Report Abuse

    • Overall: 4/5

    Pretty good tips. I jsut wanted to toss out another online savings site, for those who might be looking into one. HSBC Direct (hsbc.com I think). My fiance uses that one and I use ING - both are really user friendly and offer good rates. His has been fractionally higher than mine for the past year; not enough for me to switch, but if I was looking to set up a new account, I might have chosen HSBC.

  • Yahoo! Finance User - Tuesday, February 12, 2008, 4:33PM ET  Report Abuse

    • Overall: 1/5

    The previous reviewers have done an excellent job summing up the moronic advice preached by this wannabe "expert." He has never managed money professionally and has only made money selling unreachable epiphanies to desperate and unsuspecting people. Bach continues to illustrate he is a joke. I call on you all to contact Yahoo and demand that he no longer be allowed to PAY FOR HIS ARTICALES TO BE POSTED. Yes, that's right. These clowns pay Yahoo to post this crap, hoping to get business, whether it be from buying their horrendously horrible books or other trash. It's no wonder why Yahoo can't seem to get its act together. It's so desperate for revenues that it sells these clowns space. Yahoo is dong a great injustice to its viewers and this charade must end now!

  • Yahoo! Finance User - Tuesday, February 12, 2008, 4:21PM ET  Report Abuse

    • Overall: 1/5

    Interesting, but here's where you're not keeping your readership better informed Mr. Bach. Inflation is not running at the relatively tame 4.1% the government tells us, it's running closer to 12% based on the expansion of the money supply (see: shadowstats dot com). If you're not returning 12% or better on your investments, you're going backwards. This is a time for people to be investing in non-dollar denominated assets: precious metals, dividend yielding foreign stocks, etc. And there truly is not a lot of time left. There are plenty of plays out there, but squeezing another 0.5% from a savings account or money market account is not one of them.

  • Yahoo! Finance User - Tuesday, February 12, 2008, 3:14PM ET  Report Abuse

    • Overall: 1/5

    Horrible article...sloppily researched!!! He mentions EmigrantDirect (3.6%) and ING (3.4%) as the best rates. I personally have accounts with Countrywide.com (4.75), Citibank (4.25) and E*Trade (4.1) that are SIGNIFICANTLY higher than the 2 "banks" that he mentions. I am also aware of plenty of other banks that pay more. So why did he pick those 2 low-paying banks? probably because he is getting kickbacks from them that's why...therefore this writer has LOST ALL CREDIBILITY. If he does not print a retraction with apology for his carelessness...then let us assume it was more than carelessness. He will henceforth get 1-star ratings from me on everything he ever writes. Okay...some of you will say "But he says to check with your own bank and to go online to shop for a good rate". Then WHAT THE HEY is the purpose of this column, then? Why do we have to "shop" for a rate when this clown could have done the research for us and saved us the trouble? The 2 banks he specifically mentioned IMPLY that he did just that, but clearly he did NO RESEARCH WHATSOEVER. That puts him in the same category as Penelope Trunk.

  • Yahoo! Finance User - Tuesday, February 12, 2008, 2:47PM ET  Report Abuse

    • Overall: 1/5

    Great idea, go buy a bunch of junk debt to get an extra 1% return on your savings. Load up on those CDOs! Do yourself and your family a favor and research what you are buying. Don't trust the banks to do what is right, look at what is going on and be an informed shopper.

  • Yahoo! Finance User - Tuesday, February 12, 2008, 2:12PM ET  Report Abuse

    • Overall: 1/5

    Buy stuff instead of saving dollars. People put off buying things because they think prices will fall like they did since 1990. Those days are over except for electronics.

  • Yahoo! Finance User - Tuesday, February 12, 2008, 2:10PM ET  Report Abuse

    • Overall: 5/5

    Washington Mutual should have been mentioned as a competitor to ING and Emigrant. Wamu is doing 4.25% APY on ther online savings. Emigrant is 3.60%.

  • Yahoo! Finance User - Tuesday, February 12, 2008, 1:47PM ET  Report Abuse

    • Overall: 3/5

    CP is this market? That's a lot of risk in a market that can, and has before, dried up over night. Not much taste for securitized assets right now and even less so with a potential recession. Don't for forget HSBC as a competitor to Emigrant and ING. A TIPS fund like Vanguard's VIPSX should have been mentioned here. This is slightly less liquid money (more vol), but inflation protected and principal is backed by the U.S. govt. By the way, my TIPS money yielded north of 11% last year, that's err, ah, a touch better than MARS.

  • Yahoo! Finance User - Tuesday, February 12, 2008, 1:32PM ET  Report Abuse

    • Overall: 2/5

    Good advice for the risk averse and the financially challenged despite the 125% / points typo. Pretty much everybody else on the planet knew the rates were coming down and repositinned themselves ahead of the move. Stashing your cash in a low rate CDs held in a worthless currency as equities around the world are hard hit and becoming more appealing by the day is a surefire way to stay poor...

  • Yahoo! Finance User - Tuesday, February 12, 2008, 12:45PM ET  Report Abuse

    • Overall: 5/5

    Heads up! Warren Buffet is shoring up the economy by buying up bonds....that tells me all I need to hear. Personally, wherever he goes, I'm following him!. Buy into an ETF that has Berkshire Hathaway if you can't afford the Class A stock.... wish Warren Buffet could become CFO of the USA....wow, wouldn't that be something! All the charlatans who got us into this mess would be held accountable, and we would have a balanced budget....(read his commentary about the national financial state of disrepair....)

Showing comments 6-35 of 57<< PreviousNext >>

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