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The Best Savings Account in the Country (It's Paying 4.6%)By
Tuesday, October 25, 2011
The country's best savings account is with the federal government.
The government doesn't market this product. And bankers and brokers won't tell you about it because it doesn't generate commissions. Few people know this vehicle even exists.
I'm hesitant to recommend any government-backed or government-created financial vehicle. The government bungles almost everything it touches. But I assure you, this account is a sound idea. It's currently paying 4.6% per year in interest. That's quadruple what you'd get in a savings account with your local bank.
And it's a near-perfect spot for your savings. Let me explain...
The Treasury calls this product "Series I Savings Bonds."
This is a government-backed savings account. You cannot lose your principal. And your interest rate adjusts for inflation. This is one of the safest investments in existence.
The interest income is also exempt from state and local taxes. You don't have to pay any fees to get started. Unlike regular government bonds that fluctuate in price, you cannot lose money in Series I Savings Bonds, even if the inflation rate turns negative. And, of course, it pays that astonishing 4.6%.
The government uses two factors to determine the interest rate on Series I Savings Bonds. One is a fixed interest rate that they lock in at the time of purchase. Short-term official interest rates (set by the government) determine this rate. Right now, official interest rates are at zero percent.
The second factor they use is the inflation rate. Every May 1 and November 1, the government calculates the inflation rate by using the Consumer Price Index (CPI). Then they add this rate to your fixed rate of interest for the following six months.
The CPI is currently running at 2.3% – that's a semiannual (six-month) rate. You multiply it by two to get your annual yield of 4.6%. (You can find the full details on how the interest rate gets calculated here.)
So for Series I Savings Bonds issued from May 1 until October 31, the fixed rate is zero percent and the variable rate is 4.6%. Again, that's more than four times what you can get in a savings account at your local bank.
You buy Series I Savings Bonds from the Treasury. First, go to Treasurydirect.gov and open an account. You'll need to link it to your bank account. Three days later, you'll receive your login information in the mail. You can now buy any Series I Savings Bonds – or any other government security – free of any commissions, holding charges, or transaction costs.
There is some minor "fine print"... The minimum investment is $25. The maximum is $5,000 per year, per Social Security number. (I deposited $20,000 in my account by submitting the Social Security numbers of my wife and two children in addition to my own.)
The biggest drawback is that you can't redeem your money in less than 12 months. And you can't hold it for longer than 30 years. If you redeem your money in less than five years, the government will charge you a penalty of three months of interest. (Even so, you'd come out ahead of your local savings account.)
When I found this opportunity, it sounded too good to be true. But it checks out. I put as much of my money in as the government would allow. I suggest you do the same.
Good investing,
Tom
Further Reading:
Catch up on more of Tom's best investing strategies here...
Tom explains his technique for picking safe stocks. Don't be surprised. This technique is incredibly simple...
If you don't have much capital to invest with – or you love the idea of compounding the wealth you already have – Tom has a great way for you to get started...
Market NotesAN IMPORTANT LEVEL FOR GOLD STOCKS Near the top of our watch list right now: GDX and the $52 level.
Back in the dark days of December 2008, we tagged gold stocks as one of the market's leading "rebound" candidates. The sector was the definition of "beaten up and left for dead." The "golds" behaved as we expected... and gained 116% over the following 12 months.
But as you can see from today's chart, the gold stock rally stalled in November 2010. The bulk of investors simply don't believe gold companies will enjoy years of robust gold prices. GDX, the big gold stock fund, has treaded water for the last year.
We see the makings of a low-risk, potentially high-reward trade in gold stocks and GDX right here. The fund has dipped down to the $52 level several times in the past year... And it's rallied each time. If gold holds steady here, these cheap stocks will rally again. One can buy with a tight stop loss around $52.
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