Ally CD yield no longer tops, but the terms are better

August 27th, 2009 · 2 Comments

For the last couple months, we’ve been letting the 6-month CDs in our emergency fund CD ladder expire so that we could move the money over to Ally Bank’s 9-month No Penalty CD product.  We did that again this month, but with one significant difference, this month our local credit union (Austin Telco Federal Credit Union) provides a 1-basis point higher yield than Ally’s product.  So why would we still go with Ally?

Flexibility vs. interest yield?

Flexibility vs. interest yield?

First, let’s summarize the different products and yields.  ATFCU is currently offering a 6-month term CD with a 1.86% APY.  There are no fees, but there is a minimum balance of $1,000 and there is also a penalty if you need to withdraw money before the end of the term.  If you do withdraw any money, they charge a penalty of 90-days worth of the interest you would have earned on the CD, even if you haven’t actually earned it yet.  Thus, if you have to liquidate the CD in the first 90 days, you won’t even get your principal balance back. They do allow partial withdrawals, as long as you leave a $1,000 minimum in the CD, but it isn’t clear to me if the penalty they charge is based on the amount you withdraw or whether it is always 90-days worth of interest of the opening amount.

Ally is currently offering a 9-month No Penalty CD with a 1.85% APY.  Again, there are no fees but there are also no minimums.  And the big kicker is that you can withdraw your money, though you have to take all of it out at once, but there is no penalty for doing so.  You get to keep all the interest you’ve earned so far, and you are guaranteed to get your principal back.  (Assuming you are under the FDIC limits for your relationship with Ally.)   And, I’ve just noticed a new benefit on the Overview description of this product: “For your peace of mind, accounts funded within 10 days of opening receive the highest rate during those 10 days.”  This guarantees you will at least receive the rate you saw on their site even if it takes a few days for your funding money to move through the banking system to Ally.

Given the big differences in flexibility / penalties, we’re obviously better off using the Ally No Penalty CD for our emergency fund.  If we really do have an emergency, we can withdraw our money without penalty.  Plus, we get an extra 3-months of a potentially higher APY, plus the flexibility to close the CD and open a new one, with no penalties, if rates go up.  This is certainly well worth the 0.01% APY we’re forgoing by not sticking with ATFCU.  However, it is also clear that we need to keep tracking yields on the CD products offered at a number of institutions as Ally is no longer paying the above market rates that made it so obviously a better deal.  I’m not sure at what rate difference we’d stop preferring Ally.  Is there a rate at which you’d take the more restrictive account type?

Tags: Savings

2 responses so far ↓

  1. 1 Brandon // 2009.08.27 at 2:21 pm

    Shopping around for a basis point or two seems or marginally better terms seems to be not worth the time — depending on how much money you’re stashing away. Small amount of money and short time frame means small deviations in rates have little effect on your bottom line. Then the question becomes, is the time better spent refining your options trading strategies or working on your other business ideas. From my perspective, the answer to that question, is yes.

    However, there’s the one wildcard — this blog. The blog needs fresh content to drive eyeballs and ad revenue. So, the CD rate research has an additional monetary benefit to you that the rest of us don’t get and that probably makes it worth it to you.

    For me, I’ve been continuing with my standard CD ladder at my credit union — even as you blogged about compelling reasons to switch to Ally. The question for me is at what rate spread would make it compelling to open a new account at a new bank. I don’t know what that number is, but I think it’s pretty substantial and as yet, I haven’t seen it.

  2. 2 davmp // 2009.08.28 at 9:08 am

    Hi Brandon, I agree that it probably isn’t worth shopping around if the terms aren’t critically different or the change in earned interest isn’t significant. (Where “significant” probably varies a bit from person to person.) Certainly, you’d need alot of money on deposit for a basis point or two to be significant to most people. (A basis point increase in APY on a $1,000 deposit only earns you an extra $0.10 per year.) The latter is why I’ve been focusing on the change in terms every time I talk about Ally, though it sure didn’t hurt that the yields were higher either. Now that the yield difference is inverting, I’m asking the question at what point is it worth it to switch? From my own past history on this blog, I am willing to move funds, between products that have similar terms, if the difference is around 15 to 20 basis points (which may or may not tell you how much money we have in our EF fund.) I’m even willing to open new accounts if the difference is not much more than that, after all it’s only a 10-minute process to open new online accounts now days. How should that change when the comparison isn’t apples-to-apples though?

    I certainly do hope that my rate surveys prove useful to you and other readers! They don’t take me too long to conduct and write up, and besides providing content for the blog, they help me organize my thoughts and keep track of my own behavior. I believe we’re earning almost a full percent more on our funds than we were prior to starting to pay attention to this, which is a nice bump to us. Perhaps one day you will see a “significant” spread here and migrate your funds?

    As to optimizing time spent on tasks, that’s a very good point and one everyone should factor in to how they choose to spend their time. But keep in mind that there may be additional, non-easily-measured-as-cash values involved in the choices too. There’s also only so much time one can spend on certain tasks (options trading, startup business) without burning out.

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