PERSONAL FINANCE COMMENTARY

Make Money Without Breaking a Sweat

By Joey Muffler
July 7, 2009

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 renamedAlly 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 havefallen 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!

Read more on how to make the most of your money:

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Is Your Cash Really Safe?

By Jordan DiPietro
July 7, 2009

Before last year, nobody thought too much about money market mutual funds. But 2008's cataclysmic events brought the money market industry to the brink of destruction. Amid a recent resurgence of relative calm, the SEC met late last month to discuss the future of money market funds. At issue: what will happen to the fear-induced regulations of 2008, and what rules are appropriate in the somewhat calmer waters of today's markets.

Remembering the good old days
Money market mutual funds, which many people consider risk-free investments, have provided investors with safety, security, and modest income for years. Investing in short-term securities such as Treasury bills and commercial paper, these funds have done their best to keep their net asset value at $1 -- offering institutions a fundamental source of immediate financing while consistently avoiding losses for investors. Safe. Comfortable. Cozy.

Bam! September 2008!
But then came the near-collapse of the U.S. financial system. We all remember those mind-altering September mornings: Lehman Brothers filing for bankruptcy, AIG (NYSE:AIG) scrambling to borrow billions of dollars, and an overall wave of panic washing over consumers, investors, and Wall Street alike.

For the first time in 14 years, a money market fund "broke the buck" -- in other words, its net asset value fell to $0.97 a share. That represented an immediate 3% loss on what was traditionally considered an unbreakable investment. Shortly afterward, everyone began jostling frantically to shore up funds. Bank of America (NYSE: BAC), Legg Mason (NYSE: LM), and Wells Fargo 's (NYSE: WFC) Wachovia all contributed capital to prevent their funds from breaking the buck themselves. Investors started fleeing to the safety of FDIC-insured bank savings accounts.

Here comes the government!We're saved...
Panic comes and goes. Last year, the Treasury Department and the Federal Reserve came swooping in to alleviate the public's concerns. On Sept. 19, the Treasury announced a $50 billion temporary guaranty program for money market funds to reassure investors. The Fed then expanded its emergency lending program to help financial institutions buy asset-backed securities from money market funds, in order to raise cash to pay back shareholders.

Over the past year, things have gotten more or less back to normal. Not necessarily cozy, but secure. The government's on our side. Guaranty programs and lending facilities have kept things quiet in the money market arena. And like most big banks and implicitly guaranteed institutions such as Freddie Mac (NYSE: FRE) and Fannie Mae (NYSE: FNM) -- the money market industry has suddenly become too big to fail.

Still safe...
By mid-September 2009, however, these guarantees are slated to expire. To help plan for the future, the SEC wants money market funds to behave differently going forward:

So all is good -- right?
Wrong.

Vanguard and BlackRock (NYSE: BLK), have lobbied against the floating formula, expressing fears that investors will move their funds to vehicles that offer a fixed price.Second, money market funds remain heavily reliant on the credit rating agencies, since funds must still buy assets that earn a certain minimum rating. After the financial mess exposed their dubious practices, we now know just how little we can trust such agencies' ratings.Lastly, and most importantly, money market funds will continue to act as "shadow banks" -- implicitly promising the preservation of capital without the supervision or regulation of normal banks. Money market funds are observed by the SEC. On the contrary, banks typically face regulation on multiple fronts from entities including the FDIC, the Federal Reserve, the OCC, and state regulatory agencies.

Given that money market funds continue to claim status as a safe haven for investors, without abiding by the same rules and regulations that banks must obey, how protected do you feel? Let me know by leaving your comments below -- and stay tuned for future coverage.

For related Foolishness:

Where To Park Your CashIs Your Money Market Fund Safe?Will Money Funds Finally "Break the Buck"?