Where to Stash Your Cash

Last Updated Sep 20, 2010 7:24 PM EDT

Many brokerage accounts are currently paying a whole lot of nothing, by which I literally mean a 0.00 percent APY return. Even my Alliant Credit Union savings account recently dropped their rate to 1.35 percent APY. That's the bad news. The good news is that I'm happy to say I just found an unlikely place to stash my cash.

To be more precise, it's not actually one place - it's ten. I just opened ten different five-year Ally Bank CDs for money I might need as soon as four months.

Ally Bank 5-Year CD
I've written about the Ally Bank five-year CD before in Four CDs that Protect Against the Bond Bubble. Though it yields only 2.69% APY, what makes this CD so spectacular is that it has a 60 day simple interest early withdrawal penalty. This feature suddenly makes this a "near cash" equivalent, as noted in the Mint.com blog by Matthew Amster-Burton entitled "Finding Higher Yields in Unlikely Places."

Here are my calculations of your APY based on how long you leave the funds in the account. If you cash out before five years, you'll end up paying a penalty of $4.36 for every $1,000 you invest.

Note that you can lose money if you withdraw the funds before the first two months. That's why I call this "near cash" rather than cash. But after only four months, the APY nets out to be 1.36%, which is slightly higher than Alliant Credit Union.

An added benefit is that the rate can't go down over the five-year period as it can with nearly every money market and savings account. And over a one year period, it yields 2.25% after paying the penalty. That's nearly a full percentage point over the best savings account alternative.

No Partial Withdrawals
Ally Bank doesn't allow partial withdrawals on their five-year CD. Thus, if you put in $100,000 and find yourself in need of $10,000, you'd have to cash in the whole CD and hope that rates are still as high.

This may seem like a deal breaker, yet the problem is easily solved. Rather than open up a $100,000 CD, I opted for ten $10,000 CDs. So any cash I need, I can take out in chunks of $10,000. The customer representative was actually willing to open up a hundred $1,000 CDs, but I opted for the simpler approach.

My Advice
Ever the skeptic, I examined these CDs from every possible angle, and frankly don't know why Ally Bank does this, though I do know it's FDIC insured. That said, they could change their terms, including rates and penalties, at any time. To cover those bases, I urge you to do your own due-diligence.

Consider opening up an Ally Bank money market account as well so that, when you need the cash, they can move it to your money market account and you'd have immediate access to it. Even their money market account pays a 1.25% APY, so it's a good place to leave your cash that you have converted from your near cash Ally Bank CDs.

The financial services industry makes a fortune by paying us nothing for our cash. Cash is another hidden fee. Make sure you're the only one who profits from your cash.

More on MoneyWatch

Four CDs That Protect Against a Bond Bubble

Cash â€" Another Hidden Brokerage Fee

High Yields â€" Why Your Advisor Suddenly Wants More Risk

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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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