Getting Better Yields on Your Cash
Have 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.
According 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.
CDs Can Still Offer Benefits
Certificates 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.
With 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.
A Ladder May Help Even Out the Lean Times
Traditionally, 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 one-year CD.
The 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 higher rate.
Just Starting? Consider Shortening Your Ladder
If 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 maturities.
Treasury Securities Offer Safe Alternative
If 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 advantages.
Treasury securities that you may want to consider for short term-investments include:
Treasury 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.
Savings 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.
Treasury 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
If 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.
Carrying 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.
Let a Professional Be Your Guide
Consider 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.
Hypothetical 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 situation. 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