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Ask The Expert

About Richard Barrington, CFA & MoneyRates.com Senior Financial Analyst
Richard Barrington

Richard Barrington, CFA, is the primary spokesperson and personal finance expert for MoneyRates. He is a 20-year veteran of the financial industry, including having served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. He earned his Chartered Financial Analyst designation in 1991 with the Association for Investment Management and Research (AIMR). Richard has written extensively on investment topics, including investments, money market accounts, certificates of deposit, and personal finance as it relates to retirement.

Richard has been quoted by numerous media publications such as The New York Times, The Wall Street Journal, and Pensions & Investments magazine.[...] Read more Richard can discuss economic and market history in detail and is well respected for his ability to relate to a broad audience from a personal financial standpoint. Richard approaches financial topics with an understanding that fresh perspectives are often more valuable than mainstream consensus. He has written for over 50 financial Web sites, such as Investopedia, Yahoo, MSN, Allbusiness, and Encarta, and is most sought after by members of the media for his niche expertise in these topics: Certificates of Deposit, Money Market and Savings Accounts, Saving for Retirement, Housing and Mortgage Meltdown, Interest rates, Investments, Macro Economic and Government Policy Issues, Historical Financial Events, Discerning Long Term Implications

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Is there a middle ground between low-return deposit accounts and high-risk stocks?

August 3, 2015

| MoneyRates.com Senior Financial Analyst, CFA

Q: Is there a middle-ground type of investment between the low interest rate of, for example, a certificate of deposit, and the high risk of stocks?

A: Yours is a timely question because the extreme low interest rates of recent years seems to have widened the gulf between deposit accounts and the stock market. While there is no perfect middle-ground investment, you do have some options for bridging the gap to some degree.

According to the Federal Deposit Insurance Corporation, 1-month CDs currently pay an average of just 0.06 percent in annual interest, and savings accounts have the same average rate as well. This means it is particularly unrewarding to sit on the sidelines if you want to avoid the risk of the stock market. As a consequence, people are relying on stocks more than they normally would, which only serves to drive stock valuations to even riskier heights.

So, what can you do to get a little better return without submitting to the full volatility of the stock market? Some options are listed below.

Limited-risk options

While none of the following is an ideal, best-of-both worlds type of solution, they are ways to get a little bit better return without accepting the full risk of the stock market:

  1. Look at longer CDs. If you can commit to CD accounts for a little longer, it can make a big impact on how much interest you earn. At 78 basis points, 5-year CD rates are currently paying 13 times what 1-month CDs yield.
  2. CD laddering. If you do not want to lock all of your money up for five years, consider a CD ladder - a series of CDs set to mature on different dates. This will allow you to benefit from the higher rates offered by longer-term CDs, while still having some of your money becoming available at regular intervals.
  3. Shop around for your CDs. It pays to compare rates to find the best CD rates. For 5-year CDs, the best CD rates are nearly three times the national average, and for 1-year CDs the best CD rates are more than five times the national average.
  4. Consider high-quality bonds. Longer-term bonds are yielding more than CDs, so if you can put up with some interim volatility, you could own an investment vehicle that will pay you more interest and be guaranteed to pay its full face value upon maturity. Just be sure you focus on high-quality bonds like U.S. Treasuries because corporate bonds would expose you to some of the same economic risks as the stock market.
  5. An asset allocation approach. Of course, deciding between stocks and lower-risk alternatives is not an all-or-nothing proposition. A blended asset mix with a limited stock allocation could give you some chance at higher returns without taking on full market risk.

There is no easy solution to this problem, nor is the cure going to be very pleasant. Higher interest rates would offer bank depositors and bond owners better returns. But on the way there, the rise in interest rates could be very disruptive to the stock and bond markets.

For more information on CD rates for your savings, visit the MoneyRates CD section.

Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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I have no credit history. Why am I considered a bad risk?

July 17, 2015

| MoneyRates.com Senior Financial Analyst, CFA

Q: I am retired, have no debts, pay my bills on time and live within my means. I have no credit rating since I have no use for credit. However, if I should require a loan (medical bills, new car, whatever) I'd be considered a bad credit risk. Why does this make sense?

A: Chalk it up to fear of the unknown. With no credit history, your financial record is an unknown as far as lenders are concerned. The history of how well borrowers have met their financial obligations in the past gives lenders some basis for judging how they will meet their obligations in the future.

Your frustration with this system is understandable. You pay your bills on time and do not run up debts, so why does that make you a bad risk? Well, having no record is better than having a bad payment history, but it does not leave lenders much to go on.

Think about this as if you were evaluating job applicants. Say you interviewed two applicants: Candidate 1 had an extensive work history with largely positive accomplishments, and Candidate 2 had no resume whatsoever. With this information, you would probably not feel as comfortable with Candidate 2 as Candidate 1.

It may well be that Candidate 2 was more talented and more energetic than the first. However, with Candidate 2's lack of a job history and a responsibility to make decisions based on more than a hunch, you would have a hard time favoring Candidate 2 over Candidate 1.

How to build a credit history without running up too much debt

The good news is that you have an opportunity to address the issue of no credit history. It sounds like you have no specific needs looming, but are simply concerned with what would happen if you did need credit someday. To prepare for that possibility, here are three things you should consider:

  1. See what your credit status really is. People tend to think that having a credit history is synonymous with having credit card accounts, but if you have had a mortgage or a car loan in the past, you may have a credit history on record. In any case, you should know what credit information is out there about you, so start by checking your credit report.
  2. Open a credit card account for cash flow purposes. If you find a no-fee card and pay your balance off every month, you can have the use of a credit card at no cost. This will help you maintain a credit history and can simplify your checking account bookkeeping because instead of several transactions a month, you can just have the one that pays off your credit card balance.
  3. Build up a reserve of savings. While savings accounts are not very rewarding these days, building a savings reserve can be an alternative to using credit if you feel you might need a chunk of money all at once in the future.

The bottom line is that having a credit history does not have to mean having debt. Building a positive credit history without building up debt helps keep your financial options fully open.

Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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Am I saving enough for a comfortable retirement?

June 19, 2015

| MoneyRates.com Senior Financial Analyst, CFA

Q: I am 24 and make $60k a year. I am currently saving 5 percent, which is about $225 a month into my company's 401(k) plan. I have a portfolio that is more aggressive since I am young and have time to wait out the stock market. I currently have $3,000 in a rollover account from my previous job. Is $225 a month enough for my retirement?

A: It sounds like you are off to a good start, but you are probably going to need to ramp up your savings rate over time.

Running your numbers through a MoneyRates Retirement Calculator shows that you are on target to accumulate a little more than $930,000 by the time you are 65. That may sound impressive, but when adjusted for projected inflation, this is the equivalent of just over $270,000 in today's dollars. When you think of stretching that over 20 or 30 years of retirement, that is not such a healthy amount.

Also, those figures are based on an assumed 8 percent rate of return, which may be a little ambitious with bond and money market rates near historic lows. You say you are invested aggressively and therefore might think you could do better than 8 percent, but be advised that even stock returns are vulnerable with interest rates at such low levels. Your best shot at a bigger nest egg comes simply from saving more.

You should work with a retirement calculator to figure out just how much more you should save. As you weigh the variables involved, keep in mind four key points:

  1. Max out your employer match. If your employer matches any portion of your 401(k) contributions, your immediate goal should be to contribute at least enough to receive the maximum match. This is less about future savings projections than making sure you don't leave any dollars on the table today.
  2. Income replacement. A savings projection may look like an impressive nest egg, but think of it in terms of income replacement - how will it look spread out over the years you plan to spend in retirement?
  3. Keep in mind taxes on withdrawals. People tend to think of retirement savings accounts as tax-free, but they are only tax-deferred. You will have to pay taxes on your 401(k) dollars when you eventually withdraw them, so the portion of your nest egg available for spending won't be quite as big as it looks.
  4. Push the upper limit. At $225 a month, you are currently saving $2,700 a year. That's a far cry from the $18,000 2015 401(k) contribution limit. That maximum may represent too hefty a portion of your current salary, but your goal should be to work closer to the maximum over the next few years.

To be regularly saving for retirement at age 24 probably puts you ahead of most of your peers. However, it is your needs, not theirs, that you need to focus on, and meeting your needs is probably going to require a higher savings rate.

Got a financial question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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How can a jump in gas prices impact mortgage rates?

June 3, 2015

| MoneyRates.com Senior Financial Analyst, CFA

Q: I've noticed prices at the gas pump have started heading up again. What could that mean for mortgage rates?

A: It was bound to happen, right? Gasoline gave consumers a nice break for a few months there, but it was never going to last. As gas prices start to make their way back up, mortgage rates are sure to follow.

Retail gas prices bottomed out around the end of January, when they were more than $1.60 a gallon cheaper than they had been at the middle of last year. They have since gained back over 60 cents a gallon, a 30 percent increase in less than four months.

All of this matters because mortgage lenders seek to build in a cushion over inflation when they set interest rates. The higher they expect inflation to be, the higher interest rates have to be to maintain that cushion. Naturally, gas prices are an important input to inflation. Thus, just as falling gas prices likely played a role in falling mortgage rates earlier this year, the opposite could be true as gas prices rise.

How does this affect consumers? Whatever your involvement with the housing market - whether you are a potential buyer, an existing home owner, or even a potential seller - higher mortgage rates could impact your plans:

  • Prospective buyers should get serious about house hunting before higher mortgage rates reduce what they can afford.
  • Long-term home owners should weigh their refinancing and home equity loan options before they get more expensive.
  • Home sellers may want to be flexible about any reasonable offers, because higher mortgage rates could start to dry up buying demand.

It can be a week-to-week annoyance when every stop at the gas station costs a few dollars more. Beyond that though, the impact of higher mortgage rates could be felt for years to come.

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Can I turn $100,000 into $1 million by the end of the decade?

May 4, 2015

| MoneyRates.com Senior Financial Analyst, CFA

Q: I have $100,000 and want to be a millionaire by the end of the decade. What do I invest in? I've heard many things about gold, silver and stocks, but I have no idea where to start. I don't even know what stocks are or how I would invest in them.

A: You sound like you are in a hurry, which can be a good thing if it motivates you to learn how to save more and invest effectively. Just be careful your hurry does not rush you into costly mistakes, because your goal of turning $100,000 into $1,000,000 by the end of the decade is probably overly ambitious.

Reality check

The end of the decade is less than five years away, so think about what it will take to turn $100,000 into $1,000,000 over that time period. Doing it solely by investment growth would require a 58.5 percent annual return each year -- a return unlikely to happen in any one year, let alone for five years in a row.

Even if you ease the time frame and shoot for $100,000 to $1,000,000 over 10 years, you would need to earn about 25.9 percent a year. Although that may be possible, it is still a challenging return to achieve without risking a substantial amount of what you have already. To put this in perspective, U.S. stocks have averaged about a 10 percent yearly return over the long run, but have also experienced extended periods with significantly lower returns.

Formulating investment goals should be the first step in any investment process, which will help you reassess and focus on more realistic goals.

Stocks and commodities

You mention stocks and commodities like silver and gold, which are publicly traded assets, meaning buyers and sellers are all trying to determine whether the price will go up or down.

In such markets, prices are quickly going to adjust to changing expectations, making it difficult to pinpoint lucrative opportunities. To a large extent, returns depend on having market insight, or at least a differing perspective from the market as a whole.

Know what you invest in

To succeed, you have to know something about where you are putting your money before you rush out and start investing. This entails understanding how different markets and asset classes behave, as well as knowing details of the specific securities in which you invest.

Becoming knowledgeable in these things is a key part of beginning to invest. You won't learn it all at once, but you should take some time to study before you start investing.

Saving is the surest wealth builder

Finally, think back on how you accumulated $100,000 in the first place. While sound investing can augment your wealth, the surest way to build your fortune is to keep earning and building your savings account.

Got a question about saving, investing or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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