One of the biggest frustrations I have heard over the past couple of years is what do to with your cash. Most checking accounts that people have to day do not bear any interest at all. In addition, the majority of savings and money market accounts will pay somewhere between .25% and .75% unless you have landed a teaser rate at the bank. If you don't pay attention closely to it, your cash at the brokerage house (Schwab, Fidelity) may actually be earning .01% on a yearly basis. Even with the teaser rates from small and big banks alike, certificate of deposits which were one of the cash go to instruments for many families have now withered away to all time lows as well. Even if you park the money away for 3 to 5 years, you are still well behind inflation after the interest you earn. This means it is more important than ever that you figure out how to manage your cash. If we continue to stay in a lower interest rate environment, you need to determine how much you really need to pay bills in bill out, how much for short term emergencies (those annoying $500 to $1,000 unexpected bills), and then determine a smarter overall strategy for your cash. Here are some potential alternatives if you think CD stands for Crummy Deal.
FDIC Insured Market Linked CD's- Every investment carries some time of risk. What if there was a way to be able to have participation in the upside of the market without having any downside risk and be FDIC insured. There are opportunities that exist today called Stock Market CD's or Index Linked CD's. These are generally FDIC insured (double check for sure), and can offer you the opportunity to participate against a particular index such as the S & P 500. Just for example purposes, the CD might be 1 year in length and offer you the opportunity to gain upside in the S & P 500 to a maximum cap (say 6%). This means if the S &P 500 goes up by 20% you only get a 6% rate of return on the CD. However, if the market goes down you will get your principal back but will not lose any money. What you really lose if the market goes down is the opportunity cost of being able to get that .50% you would have earned in your money market or savings account.
Short Term Bonds (Funds or ETF's)- Another consideration is to look at purchasing a short term bond fund. Remember that bonds are merely loans that can be made to corporations, governments, or municipalities in exchange for getting a set interest rate during the period you loan them the money. The length of maturity in most of these bond funds can be ascertained by asking what the duration is of the fund. The duration represents the overall length of maturity of the entire bond portfolio. Remember that most bond funds carry a high degree of liquidity in the sense that you can get money within a few days. The funds today that carry an under 3 year maturity may offer you the opportunity to do better than you could within your current fixed interest rate at the bank. These funds can carry risk as well including interest rate risk and default risk so you should examine these closely before making a purchase as there are no guarantees at all.
I Bonds- (Go to www.treasurydirect.gov) On September 1, 1998, the US Treasury Department began issuing Series I Savings Bonds. The main purpose behind these new "I" bonds is to protect the bond owner (investor) from inflation. Since high rates of inflation are not a problem today, the need for inflation protection is not fully appreciated by most potential savings bond purchasers. The following are the major features associated with the new I Series bonds. Where appropriate, comparisons have been made to the Series EE bonds, (which have been issued since January, 1980), and will still be available for purchase under the same rules as before. The government establishes fixed interest rates for Series I bonds every May and November a 6-month period beginning on May 1 or November 1. The government has reserved the right to establish and announce a fixed rate at other times for periods other than six months. Also, once fixed for a specific bond, the interest rate applies for the life of the bond. If you purchase these on line you can get as much as $10,000 and the rate is currently over 2% on Treasurydirect.gov.
It's important to do your homework before you make any financial decisions and you should consult a financial professional or tax specialist to be sure how these purchases can affect your overall situation. Even though the bank may seems to be a safe place, my opinion is that you are safely going backwards as after taxes and inflation you are just falling behind each year. Take a look at your options so you can figure out how to make your cash work smarter for you.
Visit oXYGenFinancial.net to request a consultation on how to make smart money moves for your future.
Written by:
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice and Services
Ted Jenkin is one of the foremost knowledgeable professionals in giving financial advice to the X and Y Generation.
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