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.