MSN Money selected their Top Money Stories of 2011. Initially, I began to dissect their list and intended to write about them all. But, I got stuck on the low interest rates for savings. This is a huge topic and decided it warranted an entire article. In fact, The Huffington Post suggests this environment, instead of helping the economy is actually keeping consumers from spending.
ANEMIC RETURNS ON SAVINGS
This one impacts anyone with money to invest in a savings account, CD, or short term bond. The historically low savings rates are slashing retirees lifestyles. All the folks looking to earn a return above 0.9% on their savings need to do some digging around.
LOW INTEREST RATES
As I updated our familys’ asset allocation this week, I was smacked in the face with the deplorable return. As we keep a hefty 20% of our portfolio in cash investments and 20% in bond type investments, I relentlessly searched for some sort of return on the fixed portion of our portfolio.
TIPS
I decided I would pursue investing in Treasury Inflation Protected Securities (TIPS). After all, at least they will keep up with inflation. Much to my dismay, Charles Schwab had none yielding a positive return. I certainly am not investing in a TIPS fund right now, because as soon as interest rates rise, the principal value of the fund will fall, netting a certain loss. In fact, the TIPS fund we currently have is priced at $117.00. Fortunately, we bought the shares when it was priced at $100.00. I decided to wait and put in a bid for the April auction and hopefully, buy individual TIPS at par. With individual TIPS, you always receive the principal payment back when the bond matures plus an adjustment to compensate for inflation.
SERIES I GOVERNMENT BONDS
Series I (for inflation) Governement Bonds are similar to TIPS. With I bonds you not only get a FIXED (does not change) rate of interest, but you get a BONUS; you receive an ADJUSTABLE rate of interest that changes along with the inflation rate. So the combined interest rate includes a fixed interest rate (currently zero) plus an inflation adjusted rate for a new combined interest rate which adjusts every six months. These bonds can be bought at your bank in small denominations up to $10,000.00 per year. They are among the best choice for inflation protection.
SHORT TERM BONDS
Next, I went on to Schwab and searched their fixed listings for bonds with terms of between 2 and 4 years. I found a great A rated bond paying close to 3% and maturing in 2013. When I went to purchase, I realized the minimum investment was $100,000.00. That was a bit steep for us! None of the other short term bonds paid more than 2%.
CERTIFICATES OF DEPOSIT
On to CDs to find out what type of interest rate I could snare for the next 2 to 3 years. At Bankrate.com the best interest rate I found was 1.29% for 2 years. For a 3 year CD, the top rate shot up to 1.53%. Although the Federal Reserve Bank alluded to keeping rates steady into 2013, there is something upsetting about settling for such a low rate.
Personally, I would rather keep our uninvested cash and fixed funds totally liquid in case rates rise in the next six months. Or maybe I’ll bite the bullet and buy a one year CD. I’ll keep you posted.
SAVE THIS ARTICLE
Although the returns on these investments are presently quite low, they will go up. Print this list out and save it. These are some good ideas for your short term funds. One thing I’ve learned from decades in the financial markets, rates go up and down. For those borrowers out there, there will come a time when you are crying for these low interest rates. For the savers and fixed investors, rates are bound to rise.
In sum, get the best rate you can but don’t tie your money up for too long as rates will eventually go up.
Where are you parking your short term cash?
image credit; Doug88888
My experience with TIPS is different. I invested some funds in Vanguard (VIPSX) and received 13.24% for a year. I expect a change in price as interest rates increase, but this was great in this volatile market.
krantcents recently posted..The 3 A’s of Success
I’ve never thought about how low interest rates would keep people from spending, but it absolutely makes sense. Oh, this stupid recession. Thanks for giving me a new perspective!
20′s Finances recently posted..Confessions of a Street Canvasser
I think we’ll be seeing even lower rates after the fed meeting next week when they start forecasting the fed funds rate 2-3 years out.
JP @ Novel Investor recently posted..New Federal Reserve Change And How It Affects You
I was concerned about investing in a TIPS fund for the very reason you mentioned, i.e., losing principal. However, I am happy I purchased TIPS directly from TreasuryDirect.gov.
Shawanda @ You Have More Than You Think recently posted..A Super Simple Homemade Dishwasher Detergent Recipe
On the topic of CDs, I opened a an Ally Bank 4-year Raise Your Rate CD a few months back. Their current rate is about 1.59%, and this CD gives you flexibility in two ways: 1) You can have the interest rate adjusted 2 times in the 4-year term. 2) Ally charges only 60 days interest as an early withdrawal penalty, if you need to get your money out early. (Also see my post: http://pfstock.blogspot.com/2011/09/ally-banks-raise-your-rate-cds.html )
pfstock recently posted..Money Market Rates 1/12
At Krantcents-You are absolutely correct. When interest rates rise, all bond investment values fall, with the exception of very very short term funds.
@20s-This is one of the most unusual interest rate envirnoments I’ve seen. Although, good if you need a loan.
@JP-I’d don’t see how the fed. funds rate can go any lower.
@Shawanda-That’s a much better choice right now, as you can hold the individual TIPS until maturity and at the least, make sure you get your principal invesment back.
@PF-That sounds like a good CD opportunity for one’s cash allocation right now. Thanks for the info.
Thanks for giving me a new perspective!But I dont have any idea about this..
Carey recently posted..PPI
Instead of leaving cash just lying around it is a good idea to invest in it so that it gives you back profit from returns. This has been a very helpful post and I hope that many people will gather a tip or two from this.
Cash should never left un-invested. This would mean that it is not working for you. However, before you invest do a cash flow of your project requirements and use investment instruments that would provide you with the cash whe you need it.
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