Moving Back Into Demand Notes

The bank that we use for depositing paychecks and paying bills has a horrible interest rate.  It’s practically non-existent actually.  So, we’ve always had a savings account for our long term savings and emergency funds.

For the longest time, I’d been using a GMAC Demand Notes account.  Basically, that was a money market account that paid a higher interest rate than any other account I’d ever seen available.  There were two catches.

First, you had to be an eligible GM employee or relative to participate.  I come from an automotive family so this was no problem.

Second, the account is not FDIC insured.  So, it’s considered along the lines of a stock or mutual fund that it could be devalued at any time.  Traditionally, this wasn’t a concern, and so in the heydey of higher interest rates, I was more than happy to take a return of 5.5% or more on our long term savings.

Last year, when both GM and GMAC were in trouble, I started to worry about the possibility of GMAC defaulting on their demand notes.  So, I pulled a pretty sizable chunk out and moved it to a new ING Direct Orange Savings account.  At the time, ING was paying almost identical rates to the Demand Notes account, and was aggressively pursuing new customers.  We even got a $25 sign up bonus!   Since ING Direct is FDIC insured, we had the best of both worlds!

Since then, ING has cut rates a lot so that they are no longer what I consider a top-tier payer of interest rates.  They are currently paying 1.25%.  GMAC Demand Notes, on the other hand, is currently paying 2.15%.  That’s a 72% premium.

I have been watching everything closely, and I believe that the risk of GMAC Demand Notes defaulting is minimal.  GMAC has received government bailout funds a couple of times, so I believe that the government has no interest in letting them fail or default.  I also believe that they’ve strengthened their balance sheet and are on the road to recovery.

So, while I don’t think that GMAC is out of the woods, I believe that the risk has been minimized to the point where we are slowly increasing our balance in our GMAC Demand Notes account.  Basically, our strategy to date is to make payments out of our ING Direct account (our winiter property tax bill was the most recent payment) and make new contributions to the GMAC Demand Notes account.

As our ‘most afraid’, we had about 95% of our long term savings in ING Direct.  As of right now, we’ve lowered that to about 85%.  I’m not sure what blend I feel comfortable with.  At this point I don’t think I’ll ever be comfortable with 100% in an uninsured account again, but I could consider a 50-50 blend being reasonable depending on market conditions.  The extra interest income is sure nice as well as long as I believe the risk to be minimal.

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14 thoughts on “Moving Back Into Demand Notes

  1. Frankly, I don't know why you're settling for 2% if you have idle cash that you're not really using. Yes, it's a good rate compared to any other checking account, but I contend some floating rate funds and mortgage backed security funds would pay triple that (at least). These are products that will actually go up when interest rates go up.

    Also, again, if this is extra cash sitting around, then why not consider a tactically managed sector based ETF portfolio? Go between conservative and aggressive whenever you need to AND overweight and underweight different sectors (i.e. biotech, healthcare, materials, etc) based on what is going in the global economy. You probably don't have the time to do this. So, hire a financial advisor to do it for you…pay them 1.5% to make an extra 10%…sounds like a good deal.

    Settling for 2% may seem great, but over the long-term, lots of extra gains will be left on the table.

  2. Also, consider using 100% principal protected structured investments (available through your local, more sophisticated financial advisory firm). You will probably end up getting around 10% with a 0% chance of losing any money (unless the firm you're going through goes bankrupt like Lehman did).

  3. Also, check out ETJ. Paying yield of 11%!!! it basically writes covered calls. Good safe place for your extra cash. You're welcome!!!

  4. Thanks for the comments. My preference is to say away from the markets with this 'bucket' of cash. The cash in question does not reflect a very big portion of our net worth, and with the exception of our emergency fund, is earmarked for specific purchases. I looked at ETJ and it looks like it's had spikes and dips, which tells me that it's sensitive to the markets to some degree. Again, this is money that I'm not willing to settle for any amount of risk. Plus, the management fees for ETJ are over 1%, which would chunk out a lot of your profits if there were gains or would pile on losses if it went down in value (which the charts show me it has done quite a bit). The protected structure investment sounds good but as far as I know, Lehman DID go bankrupt so there seems to be more than a little risk involved, in which case I say no thank you.

  5. try rewards checking at your local credit union or bank. i'm getting 3.5% FDIC insured on up to $50,000 at lake city bank in indiana. Over $50,000 I get .5%. The catch is you have to meet the minimal number of check card transactions and autodebits per month and sign-up for paperless statements. If you don't meet the minimum then you get the .5% rate.

  6. I am getting 5.5% FDIC insured on up to $50,000 at lake city bank in Indiana. Over $80,000 I get .8%. The catch is you have to meet the minimal number of check card transactions and auto debits per month and sign-up for paperless statements. If you don’t meet the minimum then you get the .8% rate.

  7. over 50 percent of ally financial is owned by the federal government. if you are eligible to invest as I am , place as much money as you can in ally demand notes. the risk is minimal. ally limits your investment to 15 million dollars. if they did not have restrictions as to who can invest and dollar limits, ally financial would be swamped with money. as for lack of fdic insurance always remember the following…. never invest in a bank that is financially weak. ally demand notes are a good deal and so are ge interest plus and ford interest advantage.

  8. Over 50 percent of ally financial is owned by the federal government. if you are eligible to invest as I am , place as much money as you can in ally demand notes. the risk is minimal. ally limits your investment to 15 million dollars. if they did not have restrictions as to who can invest and dollar limits, ally financial would be swamped with money. as for lack of FDIC insurance always remember the following…. never invest in a bank that is financially weak. ally demand notes are a good deal and so are ge interest plus and ford interest advantage.

  9. A Demand Note is a type of United States paper money that was issued between August 1861 and April 1862 during the American Civil War in denominations of 5, 10, and 20 US$. Demand Notes were the first type of paper money issued by the United States in the sense that they were the first in the series of emissions which has continuously achieved wide circulation down to the present day.

  10. it’s considered along the lines of a stock or mutual fund that it could be devalued at any time. Traditionally, this wasn’t a concern, and so in the heydey of higher interest rates, I was more than happy to take a return of 5.5% or more on our long term savings.

      • If Ally demand notes are apparently still quite “safe”—it would seem that they would have already lowered returns from 2.25%–to say 1.75%–(still the highest in the USA)without losing many depositors….just curious….HF

        • Given that the Demand Notes largely provides immediate capital for the funding of auto loans, I would think that they would want to keep this pool as large as possible. They could lower it and it would still pay a higher return than most bank or money market accounts, but they could conceivably start losing deposits from investors who might switch their funds to dividend paying stocks or the like.

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