UPDATE: Interest rate no longer worth it - Pal Prepaid Card Savings Account

[aeliz]

UPDATE: Well, this has been great for the past 2 years and it's just been a passive ~$200 a year (after the monthly fee), but as of July 1 PayPal updated their terms to make this savings account no longer worth it unless you actually need a prepaid card. They have changed it so that rate is 5% on only the first $1000, instead of $5000.  After that the rate is .49%. So you would only make about $60 a year on $5000, which is what you pay in monthly fees for the account.

Fortunately, it's very easy to close your account.
1. Log into your account
2. Under "Help," choose "Close my account" and follow the steps.  They will mail you a check with the amount in your account.  You might want to transfer the money into your other accounts and then just close it, but I went for the check.

Original Post: 8/16/14

Recently I've been looking for a slightly better interest rate for my emergency savings, because while I know it's money that needs to just be super safe, the .1% interest rate USAA gives me is a little painful. It seems like the highest interest rates you can get approach 1%, and I'll probably move the rest of my emergency funds into an account like that, but I wondered if there might be anything a little better.

I read this article on Forbes and learned about the high-interest rate savings accounts several pre-paid cards offer, up to $5000 in savings.  I'm a high school teacher, so while I know for a lot of people the interest you can get on $5k isn't a big deal, it's proportionately probably worth it for me to pursue a better rate.

I looked into Mango, which offers 6% on up to $5k, but after reading this post on this forum, it seemed like a lot of work to avoid fees, qualify for the savings account, and to be able to access your money.  I figured I'd start with the PayPal pre-paid card, because it seemed easier to access the benefit. This card offers 5% on up to $5000, and .49% for amounts over, which isn't the worst interest rate I've seen.  You do not need to set up direct deposit to qualify for the savings account, you simply have to agree to receive all communication electronically, which, well, duh you'd do that anyway.

The PaylPal Prepaid card has a monthly account fee of $4.95, and I don't think there's a way around that.  So I did the math:

(Note: edited to reflect the interest is 5% APY, not compounded as I initially thought)

• Annual card fees: $59.40
• Annual interest (5% APY on $5k, compounded quarterly): $250.00
• Annual benefit: $190.60

All right, seems like it could be worth it, so I went for it.  I've just got it up and running smoothly, so I wanted to write up my experience so you can decide if an account like this is worth it to you (and avoid some of the unnecessary steps I took).  Ultimately, once you get everything running smoothly, it is very easy to transfer money around.  It takes a couple of steps to get it out, but that doesn't seem like a big deal for money you really shouldn't touch anyway.

You can only transfer money OUT of your savings account to your prepaid card.  However, if you have your card linked to your PayPal account, you can transfer the money from your prepaid card, to your PayPal account, to your bank.  So the path looks like this:

To put money IN, the path goes:
Your bank -> PayPal Prepaid Card (debit) -> PayPal Prepaid Savings Account

To get money OUT and back into your bank account, the path goes:
PayPal Prepaid Savings Account -> PayPal Prepaid Card (debit - you can spend it now with your card; or, move it to your bank) -> PayPal -> Your bank

To get the card and set up this process:

Pre-step: If you don't have a PayPal account, it is helpful to set one up so you can set it up to be able to transfer money back into your main bank account if you want.  It's been 10 years since I established my PayPal account, so I don't have any tips on this, but it might take some time because you need to link and verify accounts, etc.  Obviously you should link your PayPal with the account you're planning to transfer money out of/in to.

• Order your PayPal pre-paid card.  (First you should read the card agreement, learn about the fees, etc.  Most of the fees are ATM related, which I don't care about because I don't plan to spend using this card). It will take 3-5 days to arrive.
• In the meantime, link your bank account with PayPal, if you have not already. You'll need to log into PayPal.com and do that via your "Wallet."  It will take 3-5 days to link.
• Once your prepaid card arrives, activate it. If you have a PayPal account you'll be able to immediately transfer up to $300 a day, up to $2000 per month onto your card.  I recommend loading some money into your PrePaid account, e.g. $60 to cover the annual fee.
  
• Link your bank account to the PrePaid card.  You will need to do this from your bank's webpage and the process varies by institution.  My bank linked the accounts immediately, but YMMV so give it 3-5 days.

At this point, you can transfer the money into your savings, but I recommend doing the following step at the same time as step 4, just so it's all taken care of:

• (optional) In order to transfer an unlimited amount from your PayPal account (which you want in case you need to access your savings directly), you'll have to actually link your Pre-Paid card with your PayPal account. The deposit money to verify your account actually shows same day, but linking takes 3-5 days.
• (optional) I also linked the account to my Mint account, so I can monitor it and not totally forget about it.

Some additional notes:

• When they send you their card, they also send you a form with which you can opt out of them being allowed to share your information with affiliates for marketing purposes.  You have to mail it back in or call them.  I called and it took 2 minutes to opt out. So be sure to do that.
• I didn't realize I could transfer money directly from my bank account to my PrePaid card, so I did it through my PayPal account and they thought that that amount of money moving through was "unusual activity" so they froze my account and made me update passwords and verify my account and all this stuff.  It was mildly annoying, but I'm glad they're keeping an eye on things.  Anyway, just transfer money directly from you bank, it's much easier.

So I just got this up and running last week, I'm not sure how this account will be over a longer period but so far I'm happy to be earning a better interest rate on close to half of my emergency savings!

My account is closed so I'm deleting the referral link.

[sheepstache]

Sorry if this is a stupid question, but at a glance, isn't 5% of 5k $250?  Compounding doesn't matter because you don't get the 5% above 5k.

[beltim]

Sorry if this is a stupid question, but at a glance, isn't 5% of 5k $250?  Compounding doesn't matter because you don't get the 5% above 5k.

The 5k limit has nothing to do with compounding.  A 5% interest rate, compounded quarterly, would be 1.25% per quarter.  So to figure out the interest for a year, it would be 5000*(1.0125)^4 -5000 = $254.73.
Some places report interest rates as APRs, which take into account compounding.

[aeliz]

Yeah, in my initial calculation I just counted it as $250, because I wasn't sure if it was compounded, but then I found the compounding info and just stuck it into an online calculator.

Honestly compound interested confuses me, as does the idea that you're earning two different interest rates on the same account, because you'd be earning .49% on your interest I guess.  So every month you get interest on your $5000, about $20, then the next month you earn .49%/12 on that, or about 8 cents.

All in all it amounts to a few bucks here and there, which for me doesn't make a big difference on whether or not the account is worth it!

[aeliz]

Oh, actually, this account is 5% APY so it would just be $250 annually in that case!  (Plus a few cents from the .49% interest earned on your interest).

Here's the fine print from the savings account:

The Savings Account is made available to Cardholders through the Bancorp Bank; Member FDIC. To participate in the Savings Account program, Cardholder must consent to and continue receiving Communications from us in electronic form. If Cardholder is subject to Internal Revenue Service backup withholding at the time of the request to open a Savings Account, the request will be declined. Interest is calculated on the Average Daily Balance(s) of the Savings Account and is paid quarterly.

If the Average Daily Balance is $5,000.00 or less, the interest rate paid on the entire balance will be 4.91% with an annual percentage yield (APY) of 5.00%.
If the Average Daily Balance is more than $5,000.00, the interest rate paid on the portion of the Average Daily Balance which exceeds $5,000.00 will be 0.49%, and the interest paid on the portion of the Average Daily Balance which is $5,000.00 or less will be 4.91%. The annual percentage yield (APY) for this tier will range from 5.00% to 0 .72%, depending on the balance in the Savings Account.
The interest rates and APYs of each tier may change. The APYs were accurate as of June 1, 2013. These are promotional rates and may change without notice pursuant to applicable law. No minimum balance necessary to open Savings Account or obtain the yield(s). Because Savings Account funds are withdrawn through the Card Account (maximum 6 such transfers per calendar month), Card Account transaction fees could reduce the interest earned on the Savings Account. Card Account and Savings Account funds are FDIC-insured upon verification of Cardholder's identity. For purposes of FDIC coverage limit, all funds held on deposit by the Cardholder at the Bancorp Bank will be aggregated up to the coverage limit, currently $250,000.00.

[missj]

Ok, here comes probably a dumb question.

if I am understanding this correctly, if you put this $5,000 into there and then just didn't touch it you would earn $250 a year minus 59.40 in fees so $190.60 net earnings each year on JUST your initial $5,000 right?

now, please help me understand what happens to that $190.60.  are you earning compounding interest on that at 0.49%?

I'm a little dense when it comes to this stuff.

If I decide to do this (which I might) I will definitely use your referral code and... as an added bonus: my husband and I BOTH have paypal accounts and separate bank accounts, so we can probably do this twice for $10,000.

is this considered a bank account? I assume it's not FDIC insured...

[missj]

Here comes another dumb question.

They cannot afford to be giving you 5% on your money without expecting to "getcha" somehow on fees or something.

What's the catch that a savvy mustachian needs to beware of?  how are they hoping to make money off this?

are they just hoping that a bunch of window lickers are going to keep balances of less than $1,200 and therefore pay more in fees than they earn in interest?

[aeliz]

For the first question, yes, you would earn .49% on whatever amount is over $5000.  If it's because you deposit more, or from the interest you earn on the base amount, you'd earn that .49% on it.  Which is actually a lot better than my bank right now.

In regard to if there's a "trick" to this, I was also pretty skeptical of this but in reading the fine print, I feel like, at least for now, it's a good deal.  If a lot of people start using it the way I am (using it for only the savings account, not the prepaid card), it will frankly probably become not good deal for the bank and they will make changes (probably dropping the interest rate), as they are able to do at any time.

This general audiences for this card is people who cannot get bank accounts.  That tends to be low-income people, people with poor credit, etc.  Three of their advertising points are 1) there's no credit check and 2) this is a lot safer than cash and 3) can save you in check-cashing feeds.  To me that pretty clearly suggest they expect most of their users will be more marginal financially.

They make most of the money for this account off fees.  The baseline fee is $60 a year, but there are additional fees for actually using the prepaid card, so most people who use the card the way it's intended (as a ATM/debit card) will pay substantially more in fees, not to mention the point-of-purchase fees the bank collects from vendors.  Additionally, most of their target audience probably cannot afford to save very much, much less already have $5000 they can put in this account.  If you have ~$1200 in savings you would break even on interest & the card fee.

Though I have no love for PayPal per se, they are a giant company and with that comes a certain security.  While I fully expect them to be 100% focused on their bottom line, I don't think they're going to be shady, per se, any more than any other financial institution.

[aeliz]

Oh, and it IS FDIC insured.  I would not have done it if it weren't!!  (I just made it bold in that fine print I quoted a couple of posts up).

[sheepstache]

Okay, thanks.  Yeah, you didn't say but I assumed it was APY since if they could advertise it as 5.09% they would :)

I know it's a small thing but it makes the difference of whether it's a better deal for me than my 4.25% account with lower costs.

now, please help me understand what happens to that $190.60.  are you earning compounding interest on that at 0.49%?

That's my understanding at this point.  Although presumably since bank transfers are free you'd regularly withdraw the interest to get a better rate of return somewhere else.

[aeliz]

Oh, and to answer missj's last question, I think the most mustachian thing you can do with any account is just to monitor it closely (hence my suggestion to link it to Mint) and then if it's not working out how you wanted you can just close it out.

Okay, thanks.  Yeah, you didn't say but I assumed it was APY since if they could advertise it as 5.09% they would :)

I know it's a small thing but it makes the difference of whether it's a better deal for me than my 4.25% account with lower costs.

now, please help me understand what happens to that $190.60.  are you earning compounding interest on that at 0.49%?

That's my understanding at this point.  Although presumably since bank transfers are free you'd regularly withdraw the interest to get a better rate of return somewhere else.

Which is what I'm thinking of doing!  Although .49% is already way more than my current savings account.

Where do you have your 4.25% account if you don't mind me asking?

[missj]

ok, this helps.

You posted the fine print AFTER my post, and now I am pleased to learn that the APY on your compounding interest will actually be 0.72%
 
Even better deal!

Okay, thanks.  Yeah, you didn't say but I assumed it was APY since if they could advertise it as 5.09% they would :)

I know it's a small thing but it makes the difference of whether it's a better deal for me than my 4.25% account with lower costs.

may I ask where you are getting a 4.25% account with lower costs?

[waltworks]

Radness. I already use PP for all kinds of customer stuff so this is a slam dunk for me. It's going to be a bit annoying to spend 2.5 months transferring that money $300 at a time, but for a free $190 on money I'm not willing to otherwise invest... no brainer.

I used the referral code. Hope you get some sort of benefit out of it!

-W

[aeliz]

Hm, I'm not sure if that is what the fine print is saying, but in focusing in on it I'm confused!

If the Average Daily Balance is more than $5,000.00, the interest rate paid on the portion of the Average Daily Balance which exceeds $5,000.00 will be 0.49%, and the interest paid on the portion of the Average Daily Balance which is $5,000.00 or less will be 4.91%. The annual percentage yield (APY) for this tier will range from 5.00% to 0 .72%, depending on the balance in the Savings Account.

But in reading this I'm not sure what "this tier" is referring to?  Isn't that the $5000 and under?  I'm reading that to mean that the rate could fluctuate own to .72%...  Anyone else have any idea what this means?

[missj]

Radness. I already use PP for all kinds of customer stuff so this is a slam dunk for me. It's going to be a bit annoying to spend 2.5 months transferring that money $300 at a time, but for a free $190 on money I'm not willing to otherwise invest... no brainer.

I used the referral code. Hope you get some sort of benefit out of it!

-W

I don't understand why you have to do this $300 at a time?

[aeliz]

Radness. I already use PP for all kinds of customer stuff so this is a slam dunk for me. It's going to be a bit annoying to spend 2.5 months transferring that money $300 at a time, but for a free $190 on money I'm not willing to otherwise invest... no brainer.

I used the referral code. Hope you get some sort of benefit out of it!

-W

You only have the $300 daily limit if you don't link either your PayPal account or your bank account to your PrePaid card.  If you have a PayPal account, you can transfer $300/day without doing anything, they're automatically connected with that limitation.  But if you actually link the accounts (go through the process of having them deposit a couple cents and verify the account), there's no daily limit.  (See optional step 1 above).  Also, if you link your main bank account with the prepaid card, you can transfer as much as your bank will let you transfer immediately (step 4).

I set up my account last week and have already transferred the full $5000 once everything got linked. Hope this helps!

[waltworks]

Got it. I'll link everything up as suggested and just do it in one fell swoop. Once again, so many thanks!

-W

Radness. I already use PP for all kinds of customer stuff so this is a slam dunk for me. It's going to be a bit annoying to spend 2.5 months transferring that money $300 at a time, but for a free $190 on money I'm not willing to otherwise invest... no brainer.

I used the referral code. Hope you get some sort of benefit out of it!

-W

You only have the $300 daily limit if you don't link either your PayPal account or your bank account to your PrePaid card.  If you have a PayPal account, you can transfer $300/day without doing anything, they're automatically connected with that limitation.  But if you actually link the accounts (go through the process of having them deposit a couple cents and verify the account), there's no daily limit.  (See optional step 1 above).  Also, if you link your main bank account with the prepaid card, you can transfer as much as your bank will let you transfer immediately (step 4).

I set up my account last week and have already transferred the full $5000 once everything got linked. Hope this helps!

[sheepstache]

Where do you have your 4.25% account if you don't mind me asking?

may I ask where you are getting a 4.25% account with lower costs?

It's La Capitol credit union which I think you can't join without being associated with the Louisiana government which I got through an in-law.  Sorry :(  It's a rewards checking account so it requires minimum debit transactions each month and I just count my costs as some lost rewards and other discounts I would have gotten if I didn't have to meet that requirement, to the tune of $18 a year.

You could search for other high interest checking accounts and see if you can figure out an easy and cheap way to meet the requirements, but this Paypal account sounds pretty frikkin' sweet for not having to do anything after set-up.

[rmendpara]

That's an awful lot of work for a 3.8% net return (on no more than $5k).

Can you open multiple accounts?

[waltworks]

I am guessing that if you are already familiar with paypal and the bank verification process, it's <20 minutes of work and for those of us who like to have 5-digit emergency funds that have to be super safe/FDIC insured... it seems like a nice way to make a free $190/year.

I'll time myself and see. Right now I'm at like 1 minute (not counting MMM forum time... sigh).

-W

That's an awful lot of work for a 3.8% net return (on no more than $5k).

Can you open multiple accounts?

[missj]

That's an awful lot of work for a 3.8% net return (on no more than $5k).

Can you open multiple accounts?

I don't think so.  Let's say he put 4 hours into researching and setting all that up (probably much less in reality) 4 hours work to earn $190 with absolutely no risk seems great to me!  That's $47.50 per hour. 

Then let's say he spends half an hour once a year to remove the earnings and put them somewhere that they earn better than 0.72%.  So in every year moving foreword he earns the equivalent of $380 an hour for his efforts,  again risk free.

This wouldn't be a great strategy for his investment portfolio but since it's only for his emergency fund (which would otherwise be earning the equivalent of roughly 0.001% ) I think it's a great idea and I plan to follow suit.  And since I didn't have to do any research my hourly rate will be even higher!!!

[RWD]

Though I have no love for PayPal per se, they are a giant company and with that comes a certain security.  While I fully expect them to be 100% focused on their bottom line, I don't think they're going to be shady, per se, any more than any other financial institution.

I wouldn't trust PayPal with more than a few hundred bucks...
http://venturebeat.com/2013/08/22/paypal-freezes-35k-donation-to-fund-treatment-for-a-cancer-patient/
http://www.reddit.com/r/Entrepreneur/comments/1rkkd7/paypal_just_froze_over_70000_in_my_account_say/
http://www.escapistmagazine.com/news/view/103385-PayPal-Freezes-750K-in-MineCraft-Devs-Account
https://protonmail.ch/blog/paypal-freezes-protonmail-campaign-funds/

[waltworks]

Go google up "bank of america nightmare" or "wells fargo bag of dicks" and see what you get.

PP isn't any worse/better than any of the other mainstream financial institutions out there. I've used PP for ~15 years. Probably received/sent a cool million in money in that time. Never had a problem.

-W

Though I have no love for PayPal per se, they are a giant company and with that comes a certain security.  While I fully expect them to be 100% focused on their bottom line, I don't think they're going to be shady, per se, any more than any other financial institution.

I wouldn't trust PayPal with more than a few hundred bucks...
http://venturebeat.com/2013/08/22/paypal-freezes-35k-donation-to-fund-treatment-for-a-cancer-patient/
http://www.reddit.com/r/Entrepreneur/comments/1rkkd7/paypal_just_froze_over_70000_in_my_account_say/
http://www.escapistmagazine.com/news/view/103385-PayPal-Freezes-750K-in-MineCraft-Devs-Account
https://protonmail.ch/blog/paypal-freezes-protonmail-campaign-funds/

[Nords]

Recently I've been looking for a slightly better interest rate for my emergency savings, because while I know it's money that needs to just be super safe, the .1% interest rate USAA gives me is a little painful. It seems like the highest interest rates you can get approach 1%, and I'll probably move the rest of my emergency funds into an account like that, but I wondered if there might be anything a little better.

Personally, I think you're experiencing two issues:
1.  Picking up pennies when you could be using your time more profitably, and
2.  Chasing yield.

1.  You've just described the hoops that you jumped through to earn $190/year.  Sure, it only takes an hour or two and some additional monthly monitoring.  It's not that hard.  But you could have saved far more in the same time with much less personal effort in some other area.  You could have rebalanced out your asset allocation, figured out how to maximize your contributions to your retirement accounts, negotiated a raise at work, found some more waste in your budget, or even planted a fruit tree.  Your profit is capped by PayPal's $5000 limit and you can't scale it with other accounts.  Unless, of course, a bunch of MMM posters earn you some referral fees!

If you found pleasure and fulfillment at this PayPal effort then great, rock on with it.  But most people lead busy lives and don't want to complicate things more than necessary.  And if you're spamming us for a referral fee then you'll get exactly what that tactic deserves.

2.  You're giving $5000 to PayPal with the assurance that the FDIC will eventually give it back to you.  PayPal is hoping that you take your eye off the ball for a minute so that they can ding you with extra fees or other penalties.  The fine print is almost as bad as a cell phone contract, and even you admit that it doesn't all make sense.  In other words, you're taking extraordinary risks (and efforts) to squeeze out the last few basis points in your emergency fund because you feel that the cash is wasted at its 0.1% interest rate.

But emergency funds don't work that way.  First, you don't have to put them in low-interest accounts or leap through PayPal hoops.  You could put $5000 into your Roth IRA and withdraw that at any time for any reason with no taxes or penalties.  In fact, having it in your Roth IRA will help you make sure that it's really a no-foolin' emergency and not just some cash burning a hole in your asset allocation.

Second, your emergency fund really earns its interest when you need to spend it.  You pay cash for a car repair instead of carrying credit-card interest.  You have funds available the next time that a credit union offers a special CD rate.  You can stock up on a case of food at the grocery store because your price book tells you that it's at a multi-month low bargain price.  You can snap up a $100 bargain longboard on Craigslist because you know that you can fix it up and sell it for $200.  All of those tactics will earn you at least $190/year while the money is "just sitting there" in an account earning 0.1% interest.

Like I said, I hope that you're not spamming for referral fees.  However your 19 posts (nearly half of them on this thread) and your 16-day-old registration make me wonder what I'd find on other forums through a Google search.  I'm sure that the rest of the crowd here is less cynical than me.

Though I have no love for PayPal per se, they are a giant company and with that comes a certain security.  While I fully expect them to be 100% focused on their bottom line, I don't think they're going to be shady, per se, any more than any other financial institution.

I wouldn't trust PayPal with more than a few hundred bucks...
http://venturebeat.com/2013/08/22/paypal-freezes-35k-donation-to-fund-treatment-for-a-cancer-patient/
http://www.reddit.com/r/Entrepreneur/comments/1rkkd7/paypal_just_froze_over_70000_in_my_account_say/
http://www.escapistmagazine.com/news/view/103385-PayPal-Freezes-750K-in-MineCraft-Devs-Account
https://protonmail.ch/blog/paypal-freezes-protonmail-campaign-funds/

That was my reflex reaction. 

When I sell anything on eBay then I never keep a balance in my PayPal account until they ask for it.

[aeliz]

Well, before people have enough money to invest, they need to save, so it seems useful to have reviews and recommendations of savings products. If a product doesn't seem useful or worth it to you because you can double your emergency fund by fixing up longboards and tying your money up in CDs, then by all means do what works for you.

Personally, I'm a 31 year old high school teacher who got into the profession 4 years ago.  I just payed off my student loans last year so I have no debt whatsoever, but I only have my own relatively modest income to work with, so I'm still in the "building up savings" phase of FI (right now I only save about $11k a year which is about a third of my take-home income, and half of that goes into my Roth IRA.  My challenge to myself this year is to save more).  I've just built up my emergency funds to be over $10k, so now I'll start saving money I can invest, but I don't have that yet.  What I do have is $10k that's losing money, so as I mentioned in my initial post, while earning a higher rate on that money is probably not a big deal to other people with bigger incomes and more investments, it's a big enough amount for me proportionally for it to be worth my time.  And writing this up might help other people who read this save time going through the same process.  Maybe I'll get $5 or $10 out of that, but mostly I did find it fulfilling to write up; I like sharing useful information.  It's one of the reasons I became a teacher (not for its great FI potential, that's for sure).

I mean, if you don't want to use the service, by all means don't.  Since I took the time to write this up, and the referral is a perk they offer, then I'm going to put it out there.  If you think I'm a spambot, or just someone who doesn't know how to spend her time and money, then cool, don't use the product or the code.  No skin off my nose.

By the way, if it's not clear to anyone from my post, I can't speak to the long-term worth of this product (though I plan to revisit this thread with updates), but I wanted to write up the process while it was fresh in my mind.  Another user's post about a similar product from Mango was useful for me in deciding not to use their product, so I figured a post like this might be likewise useful for this product for some people.  But as with any financial product, and as I mentioned several times in my post, read the fine print first.  I read it and was satisfied I understood it and could live with the terms, but you don't know me so don't just take my word for it!  Read it yourself.  Understand the fees.  Then decide.

[aeliz]

Regarding PayPal, they actually did freeze my PayPal account during this process, because it is not normal for thousands of dollars to be flowing through that account (I rarely use it).  They made me change my password and verify my identity and then unfroze my account about 12 hours later.  It was such a non-issue that I didn't mention it in my initial post, because I believe that transferring your money directly from your bank account to the prepaid card would avoid this problem.  (I transferred money from my bank to PayPal, then from PayPal to my prepaid card, and I guess they thought that was suspicious).

However, if you depend on PayPal on a daily basis and a freeze would seriously disrupt your life, be aware it could happen, as it could for any transaction that seems unusual.  I would rather have them vigilant about unusual activity, but other people might find this outrageous they would do this.

[missj]

Though I have no love for PayPal per se, they are a giant company and with that comes a certain security.  While I fully expect them to be 100% focused on their bottom line, I don't think they're going to be shady, per se, any more than any other financial institution.

I wouldn't trust PayPal with more than a few hundred bucks...
http://venturebeat.com/2013/08/22/paypal-freezes-35k-donation-to-fund-treatment-for-a-cancer-patient/
http://www.reddit.com/r/Entrepreneur/comments/1rkkd7/paypal_just_froze_over_70000_in_my_account_say/
http://www.escapistmagazine.com/news/view/103385-PayPal-Freezes-750K-in-MineCraft-Devs-Account
https://protonmail.ch/blog/paypal-freezes-protonmail-campaign-funds/

FYI: When I clicked that link, my security software blocked it and said it was a "phishing" site....weird.  I clicked it again and that warning didn't come up....

That story is pretty awful, but it sounds like he will get his money back, but it also sounds like his money was in the classic paypal account and what this OP is talking about is not a classic paypal account like we are all used to thinking about, but a FDIC insured savings account offered with the paypal trademark attached to it.  I'm sure annoying things could still happen but your money "should" be safe since it's backed by the full faith and taxing power of the US government.

IMO, the most annoying thing that would probably happen here is that they reserve the right to change the interest rate at any time, so after 3 months they realize that they're not going to make any money off you and they lower your interest rate to something stupid like 0.01% and now you've done all that work for nothing, and if you don't catch it soon enough they charge you more in fees than you're earning in interest.  To me, that seems like the biggest risk.

I get the feeling that the OP is genuine in her intent behind posting her research.

[RyeWhiskey]

Other options for higher yield cash-like investments are reward checking accounts.

Unlike the PayPal account, most of these accounts are via credit unions and don't charge monthly fees. For example, I'm using one here in Portland which offers 3% on up to 10k in checking and 1.5% on up to 10k in savings. There are no monthly fees and a few basic hoops to jump through (10 debit card transactions a month, etc...) but it is easy to use and manage.

Edit: Link didn't match description.

[missj]

Other options for higher yield cash-like investments are reward checking accounts. Here's Bankrate's site which has a sortable feature for finding a high-yielding checking account nearby or nationally.

Unlike the PayPal account, most of these accounts are via credit unions and don't charge monthly fees. For example, I'm using one here in Portland which offers 3% on up to 10k in checking and 1.5% on up to 10k in savings. There are no monthly fees and a few basic hoops to jump through (10 debit card transactions a month, etc...) but it is easy to use and manage.

cool, hey I live on the outskirts of portland, OR would you mind sharing the details of that institution? also, seems strange that checking offers higher % than savings but OK by me!

[waltworks]

IMO tracking minimum transactions or changing over autodeposit or whatever are way, way more work.

-W

Other options for higher yield cash-like investments are reward checking accounts. Here's Bankrate's site which has a sortable feature for finding a high-yielding checking account nearby or nationally.

Unlike the PayPal account, most of these accounts are via credit unions and don't charge monthly fees. For example, I'm using one here in Portland which offers 3% on up to 10k in checking and 1.5% on up to 10k in savings. There are no monthly fees and a few basic hoops to jump through (10 debit card transactions a month, etc...) but it is easy to use and manage.

[RWD]

IMO, the most annoying thing that would probably happen here is that they reserve the right to change the interest rate at any time, so after 3 months they realize that they're not going to make any money off you and they lower your interest rate to something stupid like 0.01% and now you've done all that work for nothing, and if you don't catch it soon enough they charge you more in fees than you're earning in interest.  To me, that seems like the biggest risk.

I've had a PayPal account long enough to remember when they first offered an opt-in money market for your funds (no special account needed). At its peak the interest rate was about 5%. I opted in, as this was significantly better than any savings or checking accounts. After a few years the interest rate sharply dropped off to around 1%. The money market eventually closed in 2011 with an interest rate at some fraction of a percent.

I also got the credit card from PayPal back when it was backed by Providian. Its best feature was that it was a translucent green color. Eventually Providian was sold to WaMu. Then WaMu was sold to Chase. I still have the credit card, but now it's a Chase Freedom card with no connection to PayPal.

I guess there's not much point to my anecdotal PayPal stories. But I wouldn't count on PayPal offering something for more than a few years.

[RyeWhiskey]

Other options for higher yield cash-like investments are reward checking accounts. Here's Bankrate's site which has a sortable feature for finding a high-yielding checking account nearby or nationally.

Unlike the PayPal account, most of these accounts are via credit unions and don't charge monthly fees. For example, I'm using one here in Portland which offers 3% on up to 10k in checking and 1.5% on up to 10k in savings. There are no monthly fees and a few basic hoops to jump through (10 debit card transactions a month, etc...) but it is easy to use and manage.

cool, hey I live on the outskirts of portland, OR would you mind sharing the details of that institution? also, seems strange that checking offers higher % than savings but OK by me!

Sure thing: the credit union is called Trailhead Credit Union. The account is a Kasasa Checking Account which offers 3% on up to 10k in checking provided you make 10 transactions, use e-statements, and have one autodebit or direct deposit of any amount. The requirements are, in my opinion, very easy to meet as I use it as my main checking account. The savings account doesn't have as strict requirements and offers 1.5% on up to 10k.
The credit union has two locations in PDX, one on Mississippi Ave and one downtown in the Pearl. Keep in mind that all credit unions in PDX are on the co-op network so you can deposit cash at any of them and have it go into your account with no fees.

[RyeWhiskey]

IMO tracking minimum transactions or changing over autodeposit or whatever are way, way more work.

-W

They certainly can be, which is why I don't recommend more than one rewards checking account at a time. Personally, my account is my main checking account so the 'work' is negligible. On the other hand, if you're just looking for a place to park 5k then yes, PayPal would work well enough.

[kudy]

Crazy complicated, but it looks like it will work well! Thanks for figuring it all out, and I've signed up with your referral code.

[giggles]

Following as my chase reward is ready to be moved!

[missj]

thanks for the tip on Trailhead credit union, rye whiskey!
 
I just opened the account this week and will deposit my $5,000 within a few days.  Even though it's a lower interest rate, I decided to go with this instead of the PayPal (for now) because it seems much easier and there is no fine print that they can just change the rate whenever they want (they can change the rate once a quarter via vote from the board of directors...which is better than PayPal's blanket right to change whenever).

I will probably still open the PayPal account with my Next $5,000 but need to get the last of it together before I open the account to make the fees worthwhile.

[chesebert]

0   -5000
1   -4.95
2   -4.95
3   -4.95
4   -4.95
5   -4.95
6   -4.95
7   -4.95
8   -4.95
9   -4.95
10   -4.95
11   -4.95
12    $5,241.00
   
   3.71%


Looks like an effective interest rate of 3.7% on the $5000. Interest of the $5k is calculated quarterly at 1.23%, which is subject to 0.49% interest rate and is compounded quarterly. Account fees paid for 12 months.

[CanuckExpat]

Aeliz, thanks for the info, and Nords, thanks for the always helpful skepticism :)

In terms of whether this is worth your time or not, I kind of like how My Money Blog puts it:

Now, how much time do I spend on it? I won’t lie, it’s a fair amount. I really kind of see it as a hobby myself. I don’t feel I need to do it. I like to do it.
...
I’m perfectly aware that for each person that likes to do these deals, there is someone who could care less...Different strokes for different folks!

As for me, I don't mind spending a bit of extra time to squeeze some more (FDIC) yield out of cash I would be keeping in reserves anyways. I'll probably pass on this only because of the horror stories of PayPal locking up funds, but I hope it works for those who do it. I have to remember to post some of the higher yield savings account options I'm looking at if they work out, there are I suppose worse hobbies to have.

Maybe the Reader Recommendations forum is a better place than Investor Alley though :)

[Bob W]

Generally opposed to the "emergency fund" concept.   I would just go with a vanguard Roth fund or two of your choosing.    In the event of an emergency (I think we are talking unemployment here?)  You should have credit cards to fall back on and could always tap the Vanguards.  And seriously, in your profession layoffs are extremely rare. 

Let's look at $5,000 invested in a 3.7 percent concept vs. $5,000 invested at 9 percent over the stock market long haul.

In 60 years the 3.7 would equal approximately 40,000.  At 9% the 5K would equal 1,250,000.    We can quibble about the math details but that is the basic concept.   So the question is --- which would you rather leave your grandkids?   40K or 1.25 million?




 

[waltworks]

You can certainly quibble about that math since it's way off, but your basic point stands, assuming you are investing on a 60 year time horizon.

That said, some folks need/want FIDC insured very safe money for near-future needs and this is arguably a better option than a checking account earning 0.2% or whatever. Your Roth 100% stock account can lose 50% of it's value in the market in a year and then your house downpayment is gone. Sure, it will eventually recover, but not everything in life can or should just be put off indefinitely.

I've put about 1 hour into this (my bank are a bunch of morons and I had to make a phone call or two to get the external transfer to work) and the account is all set up now. Hopefully they don't cut the promo interest rate anytime soon...

-W

Generally opposed to the "emergency fund" concept.   I would just go with a vanguard Roth fund or two of your choosing.    In the event of an emergency (I think we are talking unemployment here?)  You should have credit cards to fall back on and could always tap the Vanguards.  And seriously, in your profession layoffs are extremely rare. 

Let's look at $5,000 invested in a 3.7 percent concept vs. $5,000 invested at 9 percent over the stock market long haul.

In 60 years the 3.7 would equal approximately 40,000.  At 9% the 5K would equal 1,250,000.    We can quibble about the math details but that is the basic concept.   So the question is --- which would you rather leave your grandkids?   40K or 1.25 million?




 

[rangerwwc]

aeliz,

Can you give an update?  Has it been worth it?  Any other loop hole found on the way?  Are you making/banking the 5% interest?

[waltworks]

My only update is, it works. They pay interest quarterly, I don't have to do anything. Occasionally I get an email "reminding" me that I can use my card to buy stuff.

I'm paranoid enough that I want $10k ($5k in spouse's name) in FDIC insured money at all times, so this is great for me. At some point I imagine they'll ditch the 5% promo interest rate and I'll close the accounts.

-W

[kudy]

I am having better luck with "Mango Money" - I wrote a blog post recently that broke down the earnings after fees for both. Mango is providing ~5% APR vs. the ~3.7% APR from PayPal. I have both accounts, but I am thinking of trying to open a 2nd Mango account, to transition away from PayPal.

By the way, has anyone who's signed up for the PayPal account received a 1099INT yet?

[johnny847]

I am having better luck with "Mango Money" - I wrote a blog post recently that broke down the earnings after fees for both. Mango is providing ~5% APR vs. the ~3.7% APR from PayPal. I have both accounts, but I am thinking of trying to open a 2nd Mango account, to transition away from PayPal.

The way you calculated your yields on your blog aren't quite correct when you take into account taxes. You earn 6%, get taxed on that, and then pay $3/month in fees to Mango.

Suppose your marginal rate is 31%, like me (25% fed and 6% state). For my $5000 in Mango, I earn 6% * 5000 = $300. I'm taxed on this $300 at my marginal rate of 31%, so after taxes I am left with $207. Then, I subtract the $36/year in fees and am left with $171. So my after tax yield is $171/$5000 = 3.42%.

This after tax yield of 3.42% is equivalent to a fee free savings account yielding 4.96% before tax (3.42%/ .69).

Now obviously, in this example the equivalent before tax yield is still ~5% APY. But if you look past the decimal point, they're different. (By the way, how come on your blog you say there's $292 in interest in a year for a $5000 deposit at 6%? It should be $300).

It's more noticeable for the Paypal one though, because the fees are higher. If I were to open a Paypal account

• I earn $250 on $5000
• Keep $172.5 after taxes
• Pay $59.4 in fees
• Profit 2.26% after taxes and fees
• This is equivalent to a fee free savings account of 3.28% yield before tax

[DevilsFan01x]

Hate that this is my first post on the forum but I'm actually thinking of doing this.  My only question is this and I know it'll sound dumb but what if you put in like $500 a month until you hit the $5,000 limit, how much less interest would you make?  I'm assuming the best way to do this would be to transfer the $5,000 right off the bat and then let it collect, correct?  Instead of depositing savings money into the account each month.

Thanks

[BlueBeard]

I have 3 mango accounts, and 1 union plus.  How did I not know about this?  Someone send me a referral so we can get the $5.

[cabadrin]

Long time listener, first time caller, etc, etc...

Opened a Mango account and this one from recommendations I saw here before I stumbled across FatWallet's finance forum and realized that this PayPal card is a branded netSpend prepaid card. With the actual, original netSpend card, or with at least three of the other 'brandings' (Western Union Prepaid, Brinks Money Prepaid, and ACE Prepaid) you have the same access to the 5% APY on up to 5k savings account (it takes a preliminary $500 transfer to activate, though), but there's a "pay-as-you-go" fee plan where you can have no monthly fees. (High fees to actually use the prepaid debit card, though) If you are just using it as a savings account/pseudo-CD, Mango and these other netSpend cards beat this PayPal one handedly. They also offer $20 referral bonuses, instead of $5, but it is likely you can only collect that on one of the cards.

I contacted PayPal Prepaid support about this, asking about a pay-as-you-go plan and was told how advantageous it was that I was automatically enrolled in the lower "fee advantage" plan. May be closing.

[BlueBeard]

^^ good information.  Thanks.

[kudy]

...but there's a "pay-as-you-go" fee plan where you can have no monthly fees. (High fees to actually use the prepaid debit card, though) If you are just using it as a savings account/pseudo-CD, Mango and these other netSpend cards beat this PayPal one handedly. They also offer $20 referral bonuses, instead of $5, but it is likely you can only collect that on one of the cards.

Thanks for posting this! I'd love to get away from the $5/month fee on PayPal's version of the card. Do you (or anyone else) have a referral for Netspend?

[ckosh]

Is it necessary to leave money to cover the monthly fee on the prepaid card or will Paypal just pull from the savings account?

Thanks!