Where you can stash your cash this fall
If you want to earn a decent return on your cash -- and who doesn't -- I've found a certificate of deposit that is paying way above market rate. Pentagon Federal Credit Union is having a sale on its three-to-seven year CDs. They are all paying a 2.02 percent annual percentage yield as of Nov. 1, but only for a "limited time," according to the credit union. That means the rate can change any time. PenFed, based in Alexandria, Va., has full online banking services and open membership. Funds are insured by the National Credit Union Administration, a U.S. Government agency, similar to the Federal Deposit Insurance Corporation for banks.
To put this offer in perspective, Pentagon's current rate is 2.5 times the average five year CD rate reported by Bankrate.com and nearly three times the yield of the Vanguard short-term bond fund ETF (BSV). It's also 0.5 percentage points higher than the Ally Bank CD.
Is it worth your time to open this CD? If you have a few hundred dollars, probably not. But for each $10,000, you make $202 a year. That seems worth about 30 minutes of time. If you have $100,000, that would translate to $2,020 annually.
An added bonus of this CD over bond funds is that it provides some protection against the possibility of rising interest rates. The CD has a 180 day early withdrawal penalty translating to a 1.01 percent penalty to get your money out. That compares to a 2.7% decline in value of the Vanguard Short-term Bond fund if interest rates rise by 1 percentage point.
This CD might even be appropriate for funds needed in less than three years. The chart compares annualized yields after paying the early withdrawal penalties for the Pentagon Federal Credit Union three-year CD and the Ally Bank five-year CD. The Ally Bank five-year CD has a 60-day penalty for CDs opened before December 7 of this year. After two years, Ally yields 1.47 percent annually while PenFed earns a tad more at 1.53 percent. The breakeven between the two is 21 months.
For those who are skittish about bonds and want a safe place to stash their cash, this PenFed CD sale might fit the bill. Remember that the one advantage individual investors have is that FDIC and NCUA insurance, which is capped at $250,000, is meaningful, while it is meaningless to financial institutions where $250,000 is a rounding error. Never go above insurance limits at any bank or credit union.
If you are reading this after the sale is over, I recommend looking at DepositAccounts.com to find the best rates today.