Everyone loves a good Jack and the Beanstalk investment -- the type you can bury in the ground, leave alone, and come back after a while to discover that where there once was nothing, there's now a gateway to a magical world. (Or the keys to a Ferrari, whichever you prefer.)
As savvy investors, however, we know that these types of fairy tales simply do not exist on Wall Street; even the staunchest of buy-and-hold investors would agree that some effort is required.
Yet, what if I told you there was a way to generate a small, monetary beanstalk without having to get dirty planting the seeds? Now I might really trip you up: What if I said this investment vehicle has been right in front of you all along? Give up? It's called a savings account, and which bank you choose can make a huge difference.
So, you're telling me there's a chance?
A savings account won't generate the kind of income needed for those magical Lamborghinis or Palm Beach penthouses. But this market has reinforced the lesson that keeping any funds we'll need in the next three to five years in cold, hard cash is a smart move.
Many banks offer next to nothing for your savings. But some, including the newly renamed Ally Bank and Discover Financial's (NYSE: DFS) banking unit, have pushed their way toward the top of the list.
Can you trust this ally?
In particular, Ally has drawn some controversy. Ally used to be known as GMAC Bank, and it is still a unit of GMAC. GMAC functions as both a bank holding company and an auto lender to such companies as General Motors and Chrysler, and as such may bear some exposure to their bankruptcies.
What savers should care about, though, is that Ally is an FDIC member bank, so up to $250,000 of your savings are insured by the federal government. That should be enough to assuage any fears you may have.
The most for your money
Like many online banks, Ally and Discover have focused on savings accounts and CDs. In particular, Ally has stressed the fact that its accounts come without conditions, fees, or penalties.
For example, Ally offers a nine-month no-penalty CD with a current rate of 2.05%. The account requires no minimum balance, no associated fees, and most importantly, zero penalty for early withdrawal. That compares favorably with similar products elsewhere; Bank of America (NYSE: BAC), for example, also offers a no-penalty CD, but the rate is just 1.10%, and it requires a $5,000 minimum opening balance. Discover, meanwhile, tops the list of high rates on five-year CDs, with a 3.6% rate that just beats out Ally's 3.5%.
Similarly, both Ally and Discover offer above-average rates on savings, clocking in at 2% -- along with the banking unit of American Express (NYSE: AXP). Just look at how that rate compares with rates of other banks, assuming you have $50,000 earmarked for savings:
| |
APY
|
1-Year Returns
|
5-Year Returns
|
|
Ally
|
2.00%
|
$1,010
|
$5,258
|
|
Discover Bank
|
2.00%
|
$1,010
|
$5,258
|
|
American Express Bank
|
2.00%
|
$1,010
|
$5,258
|
|
HSBC Direct (NYSE: HBC)
|
1.55%
|
$781
|
$4,029
|
|
Citigroup (NYSE: C)
|
1.40%
|
$704
|
$3,625
|
|
Bank of America
|
1.05%
|
$525
|
$2,625
|
|
Chase (NYSE: JPM)
|
0.75%
|
$375
|
$1,898
|
|
Wells Fargo (NYSE: WFC)
|
0.65%
|
$329
|
$1,629
|
Sources: Company websites and author calculations.
Most of those institutions are better known in banking than Ally and Discover, but their rates are substantially lower. And while those numbers aren't staggering, let's be honest: The difference between a $5,260 and $1,630 return is a romantic trip for two to the Caribbean.
Wait a tic …
Especially for Ally, though, higher rates have drawn the ire of other banks. GMAC, after all, is among those who've received TARP money, and some have argued that Ally is effectively benefiting from the TARP to subsidize their top rates.
On May 27, the American Bankers Association filed a formal complaint with the FDIC questioning Ally's tactics, and requesting that it lowers its rates. Ally rejected those claims. But its rates have fallen across the board as overall market rates have dropped, although they remain well above average.
No sweat, right?
A savings account is not the way to generate a tremendous amount of wealth.
It is, however, an essential element in every investor's portfolio -- if for nothing else than as a short-term safety net. And while the truly lucrative gains exist in the stock market, there's also something to be said about being able to sit back on the couch, enjoy a game and a cold beer, and rest assured knowing that your bank is currently helping you book your next trip to Jamaica.
Head over to the Motley Fool's Savings Center to read more about the prudent ways of storing away your money. If you've still got questions or have a different opportunity to discuss, leave your comments below!
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