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hearnia_2k t1_j6ib9iy wrote

Reply to comment by poke0003 in Is prepaying your rent a smart idea? by MailsDavis

In most countries the way that interest rates are advertised on accounts is regulated, so if it says 5.89% then it will indeed be 5.89%. Nobody said the 5.89% was a savings account, they said 3-5% was possible, and that their cash earns them 5.89%, but did not define how.

Making assumptions clearly doesn't help you.

Also, we're clearly NOT talking about a US HYSA here, they already said they are NOT in the US.

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poke0003 t1_j6iqd53 wrote

I assume it isn’t a hysa, but the original context of the comment was “putting the money in a savings account” and this return was being directly compared to HYSA returns. So yeah, maybe a brokerage account is averaging better, but that would be an odd thing to bring into that conversation.

The point, however, is that you cannot just look at yield and say it is all the same - risk based return colors raw yield numbers.

Edit: Also - this is specifically referencing cash equivalent investments, which further colors that return as unusually high in the context of comparison to a 3.3% U.S. HYSA yield.

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hearnia_2k t1_j6itzpl wrote

>I assume it isn’t a hysa, but the original context of the comment was “putting the money in a savings account” and this return was being directly compared to HYSA returns

Except they said a savings account (they did not use the term HYSA, which I think is US specific) was 3-5%, then went to add that personally their cash yields 5.89%, and didn't mention a savings account, plus the rate is beyond what they said could be achieved in a savings account.... suggesting their money is in something else.

>The point, however, is that you cannot just look at yield and say it is all the same - risk based return colors raw yield numbers.

Why are you now suddenly assuming it's risk based investment? I don't think anyone suggested it is.

>Edit: Also - this is specifically referencing cash equivalent investments, which further colors that return as unusually high in the context of comparison to a 3.3% U.S. HYSA yield.

Why are you saying US again? The person who quotes 5.89% is specifically NOT in the US, and said that clearly in the same sentence even.

They said: "Personally, my cash yields 5.89% but that's not in USA."

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poke0003 t1_j6iy8ud wrote

All investment is risk based - that’s why the basis for comparison is the risk free rate of return (which is really conceptual but commonly US T-Notes and T-Bills are used). Since FDIC insured account are extremely low risk, they have lower return. If there is a competing yield 259 bps higher (or even 89 bps higher), it presumably comes with either greater risk or maybe is not a similar cash equivalent investment. Certainly one difference is that it could be denominated in a less desirable/useful currency than USD. It could also be that the non-US account they have it in lacks protection equivalent to FDIC insurance (so more risk).

Again though, the key factor is that not all yields are directly comparable. No financial institution gives away a free 289 bps with zero strings attached. If your non-us SA gets 5.89%, it is very likely that either currency differences or risk exposure or both are why. This is different from comparing the rate across competing US HYSA, which I believe is what was being questioned.

So to recap:

  1. we all agree commenter is not using us savings accounts.
  2. at least I am proposing that they are getting 5.89% on their money because their instruments are not equivalent to US savings accounts.
  3. investing your year of rent money in assets materially riskier than HYSA is a choice one could make, but doesn’t really seem in the spirit of the original comments.

This concludes my TED talk.

<Wild applause from the gallery>

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hearnia_2k t1_j6j39ze wrote

Yes, OK, but a savings account is pretty low risk - the bank would need to fail, and the government not bail them out, nor pay out for any form of insurance. In the UK for example the FCA protect bank accounts up to a certain threshold, I think £85k, for example.

Of cours,e the governmen could fail itself, too, but it's very unlikely.

> Since FDIC insured account are extremely low risk, they have lower return

No idea what this is, but sounds like US specific stuff, and the comment was made by someone not in the US, nor investing in the US.

>If there is a competing yield 259 bps higher

Higher... than what? Wheredid 259 come from?

>Certainly one difference is that it could be denominated in a less desirable/useful currency than USD

Percentages don't care about currency. As with a much earlier example, if you trade bottle caps for USD (or any other currency) then you get X back. If you have 10% more bottle caps then you would get 10% more USD (or whatever currency).

>If your non-us SA gets 5.89%, it is very likely that either currency differences or risk exposure or both are why.

It's much more important to talk about exchange rates over time, which you seem to not really be talking about. It could be that after over the year to earn the 10% more bottlecaps that the bottlecaps have suffered rom greater inflation than USD.... but it also might not be the case.

>This is different from comparing the rate across competing US HYSA, which I believe is what was being questioned.

Someone else in other comments mentioned a savings account at 4.7%, sure not the 5.89% but still high. Also, here it's definitely possible to get some pretty good introductory offers on savings account, and some people are happy to jump accounts to chase the offers.

As for your recap points:

  1. Why are you assuming it's not a savings account? It might be. It might not be.
  2. OK, but nobody ever said it was equivelant to a US Savings accounts. US savings accounts are not really relevant, so it seems irrelavant.
  3. To my knowledge nobody suggested they should do anything but use a savings account, so I am not sure what relevance this is either.
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poke0003 t1_j6j5vte wrote

I think we are just talking past each other. I feel like I’m reading your points, they all agree with everything both of us are saying, and yet somehow they are presented as responses to my comment as if we are not in agreement.

It could be that I’m just not hearing it clearly over the deafening applause. ;)

ETA: 259 comes from 5.89% (589 bps) - 3.3% (330 bps) = 2.59% (259 bps). Likewise, 89 bps came from just the difference between 5.89% and the top end estimate of 5.00%.

No assumptions have been made about whether the higher yield vehicle is a savings account, only that it is not a US savings account at a bank (I.e. FDIC insured).

Savings account that we normally think of with banks are pretty low risk (and in the US, which is not what commenter in invested in, don’t yield 5.89%). It is specifically the safety of savings accounts that lead them not to yield 5.89% (in the us, for usd investments) currently. If you could get a true equivalent investment across currencies with all the safety of a US savings account that DID yield 5.89%, that would attract a lot of investment, which likely would drive down the rate due to the high demand. Alternatively, it might not attract investment because it isn’t equivalent (currency conversion costs, access issues, risk differences, etc).

While percentages are independent of currency, one reason a vehicle could provide more return is because of the currency. USD is a highly fungible and useful currency with a strong history of stability and operates as the global reserve currency. Russian rubles are extremely difficult to spend, so an investment opportunity in Russian rubles would need to provide a much higher rate of return than an equivalent opportunity in USD. Getting 100% returns restricted to rubles is, for most people, probably not as attractive as getting 3.3% in a US savings account. As a result, we wouldn’t just say that the 100% yield is better - currency matters. To relate it to your example, if the value of bottle caps was highly volatile relative to USD, such that 100 bottle caps is 100 USD last week, 50 USD this week, and maybe 150 USD next week, you would need additional return on your bottle cap investment that would cover the cost of hedging against USD / bottle cap fluctuations to have the return be comparable to a USD denominated vehicle. A more real world example might be if you had a crypto denominated savings account.

Finally, the comment that started this specifically referenced getting 3-5% returns in a savings account for someone living in NYC (and paying rent in USD). Hence all the context about USD and US savings accounts. Skepticism is being expressed that a cash equivalent investment that can be converted to USD to pay rent with the safety of a US savings account would really return 5.89%. That sounds suspiciously high. The theory proposed is that some combination of currency exposure risk, default risk, liquidity risk, or other risk that is greater than a IS Savings account is driving the yield up that high.

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hearnia_2k t1_j6mb08e wrote

>I think we are just talking past each other. I feel like I’m reading your points, they all agree with everything both of us are saying, and yet somehow they are presented as responses to my comment as if we are not in agreement.

Peraps, to some degree, yes. However, you seem to be very focussed on US examples, which are not relavant. When the point about the 3-5% savings accounts was made the commenter we did not know (at least I didn't, and I guess they didn't) that OP was in the US. So, for all intents and purposes, the US is no more relevant than any other country as the benchmark.

>ETA: 259 comes from 5.89% (589 bps) - 3.3% (330 bps) = 2.59% (259 bps). Likewise, 89 bps came from just the difference between 5.89% and the top end estimate of 5.00%.

Where does 3.3% come from?

>No assumptions have been made about whether the higher yield vehicle is a savings account, only that it is not a US savings account at a bank (I.e. FDIC insured).

OK.

>Savings account that we normally think of with banks are pretty low risk (and in the US, which is not what commenter in invested in, don’t yield 5.89%). It is specifically the safety of savings accounts that lead them not to yield 5.89% (in the us, for usd investments) currently. If you could get a true equivalent investment across currencies with all the safety of a US savings account that DID yield 5.89%, that would attract a lot of investment, which likely would drive down the rate due to the high demand. Alternatively, it might not attract investment because it isn’t equivalent (currency conversion costs, access issues, risk differences, etc).

I think I pointed out already that other countries also have similar insurance schemes (I don't know much about FDIC, but in the UK the FCA insures up to something like £85k per individual, which should be more than a years rent. I would bet this is common in most developed nations.) In the UK I am pretty sure you could get roughly 5.89% in a savings account if you took advantage of introducory offers and things.

However, if the interest rate is only marginally better than the US then it would not make sense for a US investor to trade currencies to invest in foreign savings accounts, and have the hassle of management etc, plus the cost of the currency exchange - doing this twice could easily take away a significant portion of any gains. The effort and currency conversions are big enough that if the risk is equal it would not be worth the effort, and for a lot of people that would even be true if they were to make a small amount of extra money, and guaranteed to do so... it's simpy a lot of effort.

>While percentages are independent of currency, one reason a vehicle could provide more return is because of the currency. USD is a highly fungible and useful currency with a strong history of stability and operates as the global reserve currency. Russian rubles are extremely difficult to spend, so an investment opportunity in Russian rubles would need to provide a much higher rate of return than an equivalent opportunity in USD. Getting 100% returns restricted to rubles is, for most people, probably not as attractive as getting 3.3% in a US savings account. As a result, we wouldn’t just say that the 100% yield is better - currency matters. To relate it to your example, if the value of bottle caps was highly volatile relative to USD, such that 100 bottle caps is 100 USD last week, 50 USD this week, and maybe 150 USD next week, you would need additional return on your bottle cap investment that would cover the cost of hedging against USD / bottle cap fluctuations to have the return be comparable to a USD denominated vehicle. A more real world example might be if you had a crypto denominated savings account.

Yep, some good points. USD is widely used, of course, including for most foreign transactions, as I'm sure you know. There are of course other currencies in reasonably stable positions, for example GBP, EUR, CHF.

Of course, some currencies are more volatile, and that is important, but this is part of why people would typically not open foreign savings accounts, which is why the initial suggestion seemed odd. It would make sense if your home currency was volatile, or facing issues like high inflation, but most developed nations are not in that position - of course, there are plenty of places where it does make sense. Though, arguably in those places are people are less likely to have th emeans to take advantage of foreign investment opportunities.

Also, unless exchange rate volatility is particularly high then keeping to your own currency hasn't got a great risk - For example GBP to USD has changed quite a lot over he last 5-10 years, but on a day-to-day it's not had a vast impact.

I like the comparison of crypto to bottle caps I mentioned.

>Finally, the comment that started this specifically referenced getting 3-5% returns in a savings account for someone living in NYC (and paying rent in USD). Hence all the context about USD and US savings accounts.

Already mentioned, we did not know at the time, at least I did not, and maybe the person who made he 3-5% comment also did not.

> Skepticism is being expressed that a cash equivalent investment that can be converted to USD to pay rent with the safety of a US savings account would really return 5.89%

I fully agree that there is a risk to that conversion. The skepticism is that investment in a foreign savings account could be repatriated to your home country effectively to take advantage of likely minimal or equal interest rate benefits. However, I see no reason to link this to USD and I think doing so is making things muddy.

The 3-5% comment was made by someone not in the US, not using US savings accounts, and as far as I know unaware OP was in the US, and 'not in a developing country'.

I think that for someone to invest in a savings account in another country there would need to be quite a significant benefit, and 1-2% would not be enough at all, assuming they have a stable home currency, especially when only talking about the value of a years rent.

The benefit of a foreign savings account is greater to people with an unstable, or highly inflating currency - this is not the case for the person making the 3-5% comment. If someone did want a foreign savings account I'm not sure they'd want to pick a US savings account, due to complex US tax laws, particularly if there was any risk of the person gaining tax nexus in the US by having such an account (not sure if they would, but gaining US tax nexus sucks).

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