Six months ago, I wrote on BestCashCow about the benefits and disadvantages of No Penalty CDs. At the time, my analysis focused heavily on the opportunity to gain a small amount of yield over savings accounts with no risk and very little inconvenience. So long as you do not need to access you cash for 10 days, the two main drawbacks are that you ordinarily need to close (and reopen) the entire product in order to make even a small withdrawal and you need to monitor rates in a rising rate environment to be sure that you are still earning a competitive rate (BestCashCow makes monitoring rates easy here).

My article was based on the assumption that savings rates would continue to rise in the manner in which the Federal Reserve was guiding at the time and that we would see savings rates over 3% in 2019. Since then, the Federal Reserve has lost its independence from the Executive branch and its most recent guidance indicates that it isn’t going to be raising the Fed funds rate in 2019. CD rates had already begun coming down before the President (directly and through Stephen Moore) and Larry Kudlow launched an attack last week on Jerome Powell, demanding an immediate 50 basis points reduction in the Fed Funds rate in order to combat an inverted yield curve.

It is now highly unlikely that savings rates are going to be increasing as we go through 2019, and it is very possible that they could fall from here. That makes any opportunity to earn a premium over your current savings rate very attractive, and it also makes it attractive to lock in such a rate for around a year. But, you should be hesitant to go out much longer than a year as there is not much of a premium in longer term CDs at the moment and the Fed is still guiding towards a Fed Funds raise in 2020).

As of this writing, you can still find a one-year CD that yield 2.80% or more. You can find those rates online. You can also find them at banks near you and credit unions near you.

In an environment where rates are not going up and where there is a still premium in one-year CDs, the main reason that people resist one-year CDs is the early withdrawal penalties. Most online banks charge a penalty of at least 3 months interest should you require your cash before maturity, and this penalty can invade principal. Some banks and credit union charge more than others for early withdrawal.

No Penalty CDs do not bear the risk of an early withdrawal penalty and enable you to lock in a rate for about a year.

As of this writing there are three interesting No Penalty CDs being offered by major online banks. Purepoint is offering 2.60% on their 13-month, Marcus is offer 2.35% on their 13-month and Ally is offering 2.30% on their 11-month. At each of these banks, these rates not only represent a premium over the comparable online savings rate, but also prevent your rate from falling. You, however, may still find higher online savings rates from other banks, but you’ll bear the risk of falling rates during this year in which the direction and independence of the Federal Reserve has become less certain.

You can always check No Penalty CD rates along with other special term CD rates here.

Editor's Note: On April 9, 2019, Purepoint lowered their 13-Month No Penalty CD rate from 2.60% to 2.50%.

The Fed’s March meeting ended with guidance that it is going to keep the Fed Funds rate on hold until at least early 2020 and the Trump Administration is actively campaigning for an immediate reduction in the rate in order to fight off an inverted yield curve.

Against this new reality, those who have cash that they aren’t going to need for a while might want to consider CDs.

Here are some products that we find particularly compelling:

1. Colorado Federal Savings Bank – 2.86% 1-Year CD, $5,000 Minimum

CSFB has been around for a while, and while they have never been competitive on the online savings side, their online CDs have been attractive. After raising their CD rates on March 15, their one-year CD is one basis point above the next highest rate. Their early withdrawal penalty is 3 months interest. It is a smaller bank so you should be careful not to go above FDIC limits.

2. CitizensAccess – 2.85% 1-Year CD, $5,000 Minimum

CitizensAccess has gotten positive reviews on BestCashCow since launching in 2018. Their accounts are easy to open and manage online and the penalty for early withdrawal is also only 3 months interest.

Check out the best 1-year CD rates here.

3. Purepoint – 2.60% 13-Month No Penalty CD, $10,000 Minimum

Even with the change in the Federal Reserve’s disposition, many are hesitant to lock their money in for a year. We recently recommended, therefore, that people take a new look at No Penalty CDs. Within the No Penalty CD space, Purepoint’s 2.60% 13-Month No Penalty CD is the most attractive. It represents at least a 10 basis point premium on the best savings accounts (and a 25 basis point premium on Purepoint’s savings account) and does not have the liquidity risk of CDs.

Check out other No Penalty and Special Term CD rates here.

4. My Savings Direct – 2.40% Savings Rate, $1 Minimum Balance.

My Savings Direct is owned by Emigrant Bank. While Emigrant has disappointed customers by lowering rates and playing games in the past, they have held their savings rates constant for the last few months and may have moved beyond their past games. For now, their rate is one of the best rates available online with no minimum balance.

5. CIBC Bank – 2.39% Savings Rate, No Minimum Balance

CIBC is one of Canada’s largest banks and launched its US online bank in late 2018. CIBC was among the first to raise their rates when the Federal Reserve raised the Fed Funds to its current level in December. Given that they are a new entrant to the space and eager to gain a foothold in the US online savings market, we think that they will be among the last to lower rates if the Fed really begins to change course through 2019. The bank’s online savings account has no minimum balance.

See and compare all of the best online savings rates here.

Have a great month.

I was recently contacted by a journalist from a very well respected and widely circulated financial publication. She wanted my opinion of something called CNote, having already spoken with others (inside and outside the financial field) who were gushing over this product and company that had just won an award at South By Southwest in Austin.

I had not been familiar with CNote. I researched it. What I found was troubling, to say the least.

When I cofounded BestCashCow several years ago, the object of the site was to provide the largest and most comprehensive database of bank savings and CD rates in order to help people save and earn more without taking on additional risk. That remains the mission of the site today.

Alarm bells go off when I see people comparing anything to a traditional savings or CD product in order to induce people to put money that they cannot afford to risk into a product that bears none of the characteristics of a savings bank product. In the post-financial crisis era with increased consumer financial protection from the CFPB, selling a financial product that has completely different characteristics from a savings or a CD product (no liquidity parachute, no change in rates) and calling it a savings or CD product is highly troubling.

CNote is neither a savings product or a CD product. It is entirely illiquid – you can only recover 10% of your principal each quarter. This is a loan investment product with significant risk compared to a savings product from a bank. Unlike a savings or CD product, money you deposit with CNote is not insured by the FDIC, NCUA or anyone else.

CNote is now offering 2.75%. With online savings rates at or around that level and short-term CD rates much higher, the current yield that CNote is offering is quite simply much too low to justify the risk.

CNote presumably is legal under Tier 2 of Regulation A of the Securities Act of 1933 (as amended in 2015). But it is a loan investment product and bears the risk of a loan, not the risk of a savings product or a CD product. I suspect you may see regulators (the SEC and Treasury Department / Office of the Comptroller of the Currency) weigh in on the use of the terms “checking and savings” and “CDs” with the whole range of products now being promoted by the uninsured neobanks and Silicon Valley-backed outfits such as CNote. However, in the meantime it falls to you (the consumer) to product yourself by depositing money you cannot afford to risk only in products from FDIC-insured banks and NCUA-insured credit unions.

The thing that concerns me most about CNote and some of the Neobanks (such as Aspiration) is their effort to seduce consumers with their argument that they are “investing socially”. Implicit in this argument is the inference that banks and credit unions are not investing in things that are in the public good. In fact, the desire to do good is a powerful influence in FDIC insured institutions. Putting your money in local banks and credit unions that lend directly in your community is a great and perfectly safe way to keep your hard earned money working in your community (or some other community). (In fact, BestCashCow can help you to research credit unions and community banks that have goals and objectives that align with your social investing objectives).

If you cannot find a bank or credit union that meets your goals or want specifically to earn a higher rate of return by investing in, say, women-owned ventures or electric school buses, you can find social investing-oriented funds that offer rewards that are more consistent with the risk level.

You can learn more about CNote in this article in Forbes where I am quoted.

Bottom line: Steer yourself far away from CNote and products like it.