Better Yields on Your Cash
you checked your bank statement lately? If so, you may have
noticed that your savings account probably isn’t providing a
very good return on your investment these days. With the Federal
Reserve Bank continuing to keep interest rates at or near record
low levels, the return on standard cash equivalents, such as money
market accounts and traditional savings accounts, is only slightly
better than that provided by your average piggy bank.
to Bankrate.com, rate-tracking
company, the national average interest rate for passbook and
statement savings accounts is currently about 1%. In fact,
the drop in interest rates has lowered the rates of most
investment accounts traditionally thought of as savings vehicles. Fortunately,
there are some financial strategies that may help balance out low
interest rates and put your money back to work.
Can Still Offer Benefits
of deposit (CDs) generally feature the highest interest rates
available from a government-insured savings vehicle. Both the
principal investment amount and the interest earned are federally
insured up to $100,000 per account. While rates for CDs have also
dropped, they can often still provide higher returns than most
traditional savings accounts. For example, according to
Bankrate.com, six-month CDs are generally earning in the range of
.95% to 1.32% in mid-June, while one-year CDs are usually falling
into the 1.01% to 1.6% range.
a CD, you’ll need to keep your money invested until the
certificate matures, or you will face a penalty for early
withdrawal. The average CD term ranges from about three months to
five years or more. Generally, the longer the CD term, the higher
the interest rate applied to your investment.
Ladder May Help Even Out the Lean Times
many investors have used a savings strategy called “laddering”
when investing in CDs. Laddering occurs when you buy a series of
CDs with staggered, or “laddered,” maturities. For example, if
you had $2,000 to invest, you could purchase four separate $500
CDs with three-month, six-month, nine-month and one-year maturity
dates. As each CD matures, you could roll the total into a
process of laddering CD maturities moves the funds available for
you to use, if needed, every three months. Laddering can also help
even out interest rate fluctuations. If rates drop, you'll still
be locked in at higher rates for a portion of your investment.
When rates rise, your next rollover can take advantage of the
Just Starting? Consider Shortening Your
you’re thinking about starting a CD laddering strategy now, you
may want to keep your ladder short. Rather than locking your money
into long maturities of five years or more, consider establishing
shorter maturities, from three months to a maximum of one year. As
your CDs mature and interest rates begin to rise, you might extend
your ladder further out by reinvesting in CDs with longer
Treasury Securities Offer Safe Alternative
security is your primary concern, few alternatives offer the
safety and guaranteed returns of CDs. But because the U.S.
government has never defaulted on a loan, U.S. Treasury securities
are among the safest investments available, offering easy access
to your cash, competitive interest rates and, in some cases, tax
securities that you may want to consider for short
bills, which feature a $1,000 minimum, are issued in
maturities of four weeks, 13 weeks or 26 weeks. You buy
T-bills at a discount to their face value, and interest is
paid at maturity.
bonds must be held for at least six months before they can
be redeemed and you’ll need to pay a three-month interest
penalty if the bond is redeemed within five years of initial
purchase. A Series I savings bond costs as little as $50 and
pays both a fixed interest rate and an additional inflation
adjustment every six months. So, for example, if you purchase
a bond with a $50 face value, you’ll accrue monthly interest
until you sell.
inflation-indexed security (TIPS), like Series I bonds,
come with both a fixed interest rate and an adjustment for
inflation. Your semiannual interest payments and maturity
payment are tied to inflation, as measured by the Consumer
Price Index (CPI). If inflation rises, the interest rate and
amount owed to you at maturity also climbs.
Reduce Your Debt Load
you’re currently carrying high-interest debt, such as a credit
card balance, you may want to consider paying down your debt with
a low-interest loan. Keeping your debt low is always a good idea,
and paying off high-interest loans can provide a healthy return.
Before you consider such a step, however, you should already have
an emergency fund in place equal to three to six months of your
basic living expenses. An emergency fund can help cover unexpected
expenses caused by events such as car trouble or job loss.
a substantial high-interest debt can cost you hundreds of dollars
in interest. For example, if you make a monthly payment of $30 on
a $1,000 credit card bill charging 15% interest, it would take you
three years to repay your debt. In that time, you’d end up
paying more than $244 in interest.
Professional Be Your Guide
relying on the experience of a professional financial advisor to
discover the full range of higher-interest savings and investment
vehicles available to you. Your qualified financial advisor can
review your overall financial picture and help you find the
options that best fit with your future goals and plans.
example provided for illustrative purposes only.
Does not take into account transactions fee's or expenses. Past performance does not guarantee future results.
This information is provided for informational purposes
only. The information
is intended to be generic in nature and should not be applied or
relied upon in any particular situation without the advice of your
tax, legal and/or your financial advisor.
The views expressed may not be suitable for every
American Express Financial
Advisors Inc. Member NASD. American Express Company
is separate from American Express Financial Advisors Inc. and is
not a broker-dealer.
This communication is published in the United States for residents of
North and South Carolina only; and this advisor is licensed only in
the states of North and South Carolina."
Roy P. Janse
Financial Advisors, Inc.
IDS Life Insurance Company
1150 Haywood Road
Greenville, SC 29615
Phone: (800) 554-0805 x141
Fax: (864) 234-7139