Interest rates have barely lifted from ground level and are already headed lower. In the U.S. short-term interest rates are at least positive. My EU and Japanese readers are not so lucky, facing negative rates.
Low interest rates are bad enough, but watching your bank balance decline is a downright nightmare for savers. If you are close to or in retirement this can cause great financial harm.
Because rates are likely to stay at these low level for the foreseeable future and there are many safe alternatives paying more, I will publish a special report each month highlighting one of these short-term, money market-like investments. Every effort will be made to address opportunities available to as many readers across the planet as possible.
Because these special reports will be in addition to regular publications you will want to subscribe using the button at the beginning of this post so you get the reports as soon as they are published. I will also discuss short-term interest investment options on The Wealthy Accountant Facebook page as well.
Today I will share over a dozen options to earn more interest on your short-term savings. I will link to posts where I discussed some of these in detail in the past and will indicate if I am an affiliate of the program. The remaining options will get a short bio. If necessary, I will publish a complete report on the investment later.
Many investments are in U.S. dollars. Some investments allow investors from outside the U.S., but require the investment be made in dollars. This adds currency risk to mix and is something you need to consider before investing.
Finally, before we begin, many short-term investments are not guaranteed. Money market accounts are almost never a guaranteed investment. However, they are considered extremely safe. As always, research the choices I list before committing funds. No one investment is right for everyone. My goal is to provide as many choices as possible so the most readers benefit.
Alternative Short-term Investment Options
First Class Demand Notes
There is a unique investment too few people consider offered by Mercedes-Benz Financial Services called first class demand notes. For qualified investors this can be a powerful financial management tool. There are no minimums and you can withdraw funds at any time.
However, you must be an accredited investor which means you need either a $1 million net worth excluding your primary residence or a $200,000 income the past two years and expect to earn over $200,000 again this year.
Pros: Easy access to funds without waiting and a relatively high interest rate, currently 3%. I could not find anything limiting the investment to Americans only and since Mercedes-Benz is a German company it is possibly available in the eurozone as well. Highly liquid.
Cons: The program might be available outside the U.S with different terms. Only qualified investors can invest and all investors are verified to assure they are qualified before the account is opened.
Many peer-to-peer options exist. Once upon a time I was a big fan of these investment options. My personal experience and several issues in the news involving some P2P companies has raised concerns.
I still mention P2P because it is a viable option for some willing to take the added risk. I have personally invested in Peer Street, Prosper and Lending Club. My Prosper and Lending Club accounts are nearly wound down to zero and I made a reasonable return. I don’t think future investors will fare as well as it appears returns have fallen sharply. My Peer Street investment is still in limbo. Fingers crossed I turn a respectable profit.
I am in the affiliate programs of some of these companies, but no longer use the links. If I missed an affiliate link to a P2P investment, please do not use the link as I can not in good conscious recommend any of these investments. I list them here as a warning only and for the most risk tolerant readers.
Pros: Very high interest rates. Many promise 10% returns and higher.
Cons: Liquidity. Once invested, getting out quickly is difficult until the loan your money is placed in makes payment or pays off the loan. There are too many P2P companies cropping up for me to vet them all. Since the P2P company profits by making loans and servicing them while you take the risk of default, my concern (and a well-founded concern at that) is the quality of underwriting.
This is the riskiest investment on the list and is NOT guaranteed by any means. YieldStreet is unique enough with potential promise for certain investors I felt it needed a mention.
This is similar to P2P investments above with the exception these are very illiquid with 5-7 year minimum time horizons. But the returns are juicy in the low double digits.
YieldStreet invests in some unique projects. Commercial real estate is about the most normal thing in their portfolio. Other investments include art, lawsuits, large ships and more. You get to choose which projects your money is invested in. Serious due diligence is required before investing with YieldStreet.
Pros: Very high returns.
Cons: Extremely illiquid. Very high risk. Only for investors with a high risk tolerance.
Vanguard has always run a solid investment house. Money market accounts might be boring, but they offer liquidity and are very low risk (about as low risk as you can get without saying guaranteed). I used Discover Savings and Capital One 360 for many years before moving to Vanguard Prime MM Fund. I switched when Prime paid a higher rate.
Pros: Low risk of a money market fund with a relatively high interest rate currently. Very liquid.
Cons: The interest rate in Prime follows market rates and has been falling recently due to lower rates in the broader market. If rates continue falling other alternatives may perform better. It is a good idea to bookmark this page to reference back as interest rates change and different investments provide superior returns.
I used Treasury Direct to hold the working capital of my tax practice for many years. When Treasury securities dropped to near zero other investments were a better choice.
While Treasury Direct might not be the best option now, it is worth noting for future reference.
Treasury Direct is the portal for investing in U.S. government securities. You can buy bills, notes and bonds along with savings bonds and TIPS. Securities are held in the account.
T-bills have maturities as short as a few days up to a year. You can set your account on automatic, rolling over maturing securities until you need the funds. Cash is usually direct deposited back into your bank account. (Treasury Direct has a tool to hold funds awaiting investment in certain instances that I don’t like and therefore don’t recommend. Money awaiting investment is best in your regular bank account.)
Pros: Guaranteed by the U.S. government. Reasonably liquid. You can sell securities prior to maturity, but it is somewhat difficult to do. By laddering your short-term investments you can maintain reasonable liquidity.
Cons: Mildly illiquid in some cases. Rates tend to be fairly low except when the Fed is trying to slow the economy. Historically Treasury Direct was the best investment in town until ultra-low interest rates became the norm. You will want to review Treasury Direct for future use should the interest rate environment change.
Wealthfront is one of many similar investment options for short-term money cropping up and worth considering. Their rate as I write (July 29, 2019) is 2.57% and is FDIC insured up to $1 million.
The rate is relatively high for a short-term vehicle that is guaranteed (FDIC insured). There are no minimums (okay, they require at least $1) and you can get your money out at any time. Best of all, there are no income or net worth requirements.
Pros: Liquid, low minimum, reasonable good rate. Easy to open an account.
Cons: Rate lower than Mercedes program above, but still reasonable in today’s interest rate environment. Rate likely to decline if the Fed lowers rates.
Betterment is an investment company with some interesting new products to consider. The minimum is a mere $10 and is FDIC insured. There are two levels. The first level is a simple savings account paying 2.43% as of this writing. However, if you sign up for their wait list for their fee-free checking account your savings earns 2.69%.
Pros: Liquid, FDIC insured, excellent rate if on the Betterment Checking wait list.
Cons: Not much to dislike. The rate is likely to change over time so keep an eye on it. If another investment vehicle become superior you can easily move.
Ally is a favorite among readers of this blog. The rate is about what the Vanguard Prime MM fund pays (2.1% currently for Ally’s online savings account). Brand recognition provides comfort. Ally has more features than many other short-term investments listed here, allowing you to structure your account as it serves you best.
Pros: Liquid, recognizable brand, numerous features to manage your account.
Cons: Lower rate than other options listed in this post. Only available to U.S. legal permanent residents or citizens.
Worthy is a unique investment I fleshed out a few months back. The main selling point is the 5% interest rate paid on Worthy bonds.
Before you rush to invest, a few disclosures first. The link in the resources section after this post for Worthy and the link in my previous post on Worthy is an affiliate link. You and I both can get an extra $10 for using the link, just follow the rules.
Also, Worthy bonds are NOT FDIC insured or guaranteed and is not similar to money market accounts. They invest in business inventory. This could work well, but there is no guarantee of success. Worthy is a new company so you need to consider this before investing. Regardless, I would only put a portion of your short-term funds into Worthy due to the heightened risk.
I currently have $2,000 of my own money invested, plus all interest earned to date and all $10 affiliate payments received to date. That does not mean it is safe. I like to test things. A couple thousand is a nice way to test a product of this nature. Review the Worthy site and your temperament before investing.
Pros: It pays 5% with a $10 minimum. Liquid.
Cons: Higher risk compared to other savings vehicles on this page paying 2 1/2 to 3%.
We finish with the Cit Bank Savings Builder. Cit Bank pays up to 2.3%. Notice I said “up to”. You only need $100 to open an account and there is a introductory rate, however, you need a higher balance to receive the top rate.
There are a lot of moving parts to this one. If you add $100 or more each month you get a better rate if you have a low account balance. Read the details to see if it fits your needs.
Pros: A basic savings account with reasonable interest rate.
Cons: Too many moving parts considering the rate offered as of this writing.
The facts and circumstances are sure to change over time so you must be willing to move your funds periodically to earn the best rate on your short-term money. As interest rates decline again it will be more important than ever to stay vigilant.
The list above is by no means exhaustive. I intentionally left many products I researched off the list. Some were outlandishly risky (as if YieldStreet isn’t risky enough). Some I left off to keep this post brief.
I will address some of these investments in greater detail in the future and add to the list. In time I will publish a post for each geographic region of the world (eurozone, Japan, et cetera). The goal is to offer all readers at least one option that pays well for their location.
Short-term money was never meant to yield large returns. But it should at least grow some and safely.
Be sure to share investment vehicles you like but not listed here in the comments. We all benefit when we work as a team.
It seems Green Dot is currently offering 3% on their savings account to encourage new customers, plus 3% cash back on their debit card! That is so massive it makes this accountant’s eyes water. There are limits, of course, so be sure to do your due diligence.
More Wealth Building Resources
Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.
Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?
Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.
Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.
QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.
A cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.
People frequently look to their accountant for sound financial advice. Good accountants are up to the task; other, not so much. Finding a good one is easy; they tell you what you don’t want to hear even if you threaten to leave.
Advice sought from accountants runs the gamut. Selling or buying a business requires in-depth analysis and most people trust their accountant’s judgment regarding this matter.
Then the bizarre requests come. Over the years I have been pulled to the side by clients wanting advice on how to raise their children, gambling problems, infidelity, and divorce issues. Some of the requests have a hint of tax built into them. Gambling problems are also tax problems. I’m never comfortable helping anyone decide if they should end their marriage. It’s not my place or at least shouldn’t be. And even if it was I want nothing to do with that kind of conflict.
My favorite requests are about personal finance, intelligent tax reduction and retirement. These are the moments when I can shine. It is also an area of massive risk. My mantra, oft repeated, is simple, yet rarely followed. First the client is in denial (which is a river in Egypt last I checked). Quickly the client moves to tell me my advice is impossible to follow and nobody does it. (Oh, yes they do.) Finally, the client starts to bargain her way into a deeper hole. They think they can change the rules and make it easier. Don’t they know I already thought of every twist and shortcut possible? Clients usually bargain themselves into a deeper hole without even knowing it.
Half for You and Half for Me
Clint Eastwood fans are well aware of the scam Blondie and Tuco had in the 1966 movie, The Good, The Bad and the Ugly. In the movie, Blondie, played by Eastwood, captures Tuco, a wanted bandit with a price on his head. Blondie turns Tuco in for the reward. As Tuco is about to be hanged Blondie shoots the rope from a safe distance and rescues Tuco only to do it again in another town.
After each escape, Blondie shares the gold with Tuco 50/50. (“Two for you and two for me.”) Of course things go south fast when Blondie decides it is time to end the business relationship. Every movie needs to keep the plot moving.
There is a lesson in finance in the business deal of sharing the spoils 50/50. It also happens to be the first part of my most common mantra: save half your gross income. I finish the mantra with: invest it in low-cost, broad-based index funds. It’s a simple concept and easy to remember. Save half or more each time income enters the household Cash Flow Statement before taxes.
As simple as the advice is, I always get push-back. As mentioned above, clients deny it is possible as if they are starting the stages of grief. Quick as a shot they get angry when I refuse to relent: save half. Then comes the bargaining and the reason for this post.
I Have a Better Idea
Imagine a client sitting across my desk dumbfounded by such a stupid suggestion. For easy calculation we will assume said client has exactly $100,000 of income (earned and/or rental or similar types of income) with exactly a 30% tax bracket. (My advice is straight-forward; taxes are never this simple.)
The “impossible” retort is quickly shot down by your favorite accountant as a straw man argument. I have plenty of clients earning half what you do and living within their means (probably saving half their income too). I also doubt you never had a day of your adult life where your income was less than it is now. So you have plenty of practice and examples of people (even an older version of you) who have or are doing it (living on half your current income).
The argument that bills are more now doesn’t work with me either. Things have not gone up that much in price! The problem is you have three SUV payments, a cottage, second home up north (it’s a Wisconsin thing), a Jet Ski and four-wheeler to make payments on and insure. That is the real reason why you are broke so stop arguing with me.
There is a simple solution: Start selling the excess baggage until your expenses allow you to save half your income. Pay off debt! You may not agree with me, but you know I’m right.
Time to get Serious
Quicker than a bolt of lightning you start the bargaining process. Before you waste your breath, I already know what you are going to ask and you are wrong. But why, you plead? Because saving half your gross income IS easier than saving half your net. Here’s why.
Take your $100,000 minus $30,000 taxes and you have $70,000 to spend. If you save half your gross, $50,000, you only have $20,000 left to live on! Not possible, you say.
If, on the other hand, you continue, I agree you should save half your net income ($35,000) it would be easier for you to make it really happen.
What happens when you save $50,000? Well, a good portion probably goes into retirement accounts. A husband and wife can plow $18,000 each into their 401(k) plan, assuming both are working, earn enough and the employers’ plans allows the maximum contribution allowed by the tax code. (Those 50 and older can add another $6,000 each to this total. In our example we will stick with young whipper-snappers.)
Each spouse can contribute another $5,500 into a traditional IRA. Added to the $36,000 contributed to the 401(k)s (not including the employer’s match), you now have $47,000 saved out of your 50% goal of saving half your gross income. $3,000 invested in a non-qualified account (non-retirement account) rounds out the $50,000 annual investment. If a Health Savings Account or other tax deferred/tax-free vehicle is available, all the better.
The above example is very simple and few will have the same exact situation. The basic example does allow us a quick look at the final results to the family budget. First, with all the money going into tax deferred accounts you probably now qualify for the Saver’s Credit and Earned Income Credit if you have kids. Add in any Child Tax Credits or other deductions and we don’t need to work any harder to reduce your tax liability because it is zero or close to it.
So how much money do you have available to spend now? Well, your taxes dropped $30,000 when you include credits. You have $50,000 invested, plus the employer’s match, and $50,000 available to spend. (FICA taxes will reduce numbers a bit, but we want to keep it simple so we can see why it is better to save half your gross income.)
Your bargaining to save less will leave you with less to spend in the end! Saving half your net, $35,000, means your taxable income is higher and you lose several powerful tax credits. Your tax liability will be lower, but probably not zero. You also lose the Earned Income Credit and Saver’s Credit, though the Child Tax Credit should still be allowed. If your taxes are lowered by $10,000 you are left with less overall money due to higher taxes!
$100,000 income – $20,000 tax – $35,000 saved/invested leaves $45,000 to spend, or,
if you’re are lucky and your taxes are reduced more without the full savings rate
$100,000 income – $10,000 tax – $35,000 saved/invested leaves $55,000 to spend
Just because you have more available to spend in some instances by saving half your net income you are really worse off. Your net worth is down $15,000 the first year alone without consideration for the employer’s match or investment gains. You bargained your way into working a decade or longer to make up the difference needed to get your nest egg large enough to fund retirement. Is it really worth years of additional required work just to have $5,000 more to waste on a gas-guzzling SUV today? I hope not. You wouldn’t be reading this blog if you really believed that.
Give Me the Facts
When I train a group of accountants I use the phrase “facts and circumstances” a lot. The IRS tax publications do too. Your facts and circumstances will change the outcome of our example. More moving parts usually means more opportunity to reduce tax and increase investments without harming disposable income.
It’s hard saving serious amounts of money. Unfortunately it is the only way to reach a reasonable retirement in a reasonable amount of time. Forty years is not a reasonable amount of time REQUIRED to work just to have enough liquid assets to retire with the same lifestyle as when you were working.
In The Good, The Bad and the Ugly things turned out well in the end. Blondie and Tuco teamed up again to cash in on the biggest payday ever. For folks familiar with the movie, Eastwood shares the spoils 50/50 one last time. He cuts the rope when he is safely out of Tuco’s reach. A funny scene to end a classic movie.
Fun movie! Entertaining. Serious lesson few grasped. Don’t make the same mistake. Half for you and half for me. The best part, you get to keep both halves.