Personal Finance Blog By MoneyRates - March 2008

Many economists are predicting negative real returns for investors who park their cash in US Treasuries, mutual fund money markets, bank money markets, or short-term CDs. While the rates paid on these investments are still between 2% and 4% - the likelihood of at least a 50 point rate cut and potentially as much as a 100 point rate cut this week - may potentially lower yields on cash investments across the board. Inflation, on the other hand, is deemed likely to pick up as the Federal Reserve and politicans take desperate measure to minimize the economic recession and respond to various crises in the US credit markets. A snapshot of where cash returns are today follows:

90-day US Treasury Bills - yielding 0.65%

180-day US Treasury Bills - yielding 1.15%

2-year US Treasury Notes - yielding 1.32%

Mutual Fund money market - yielding 3.00% to 3.50% from large financial companies like AARP, Dreyfus, Fidelity, Vanguard

Mutual Fund short-term government bond funds - yielding 2.75% to 3.25% on mutual funds holding at least 90% government-backed securities

Bank money market accounts - national average at 2.55%, money-rates.com reporting money market accounts yielding as high as 4.00% from select online banks

Bank savings accounts - national average at 2.11%, money-rates.com reportting savings accounts yielding as high as 4.00% from select online banks

The inflation rate for the period February 2007 to February 2008 was 4.0% (or excluding energy and food costs 2.3%). Economists are predicting inflation between 3% and 5% for the remainder of 2008 indicating that the investors are likely to earn negative real returns on their cash returns until short-term interest rates increase again or inflation is kept under 3%.

Sources: Yahoo Finance, Money-rates.com, CBS Marketwatch, US Department of Labor

There have been a lot of questions about the Who? What? Where? and Why? of the government's stimulus package payment to US taxpayers recently approved by Congress. Here are all the answers provided directly by the Internal Revenue Service on their website:

Starting in May, the Treasury will begin sending economic stimulus payments to more than 130 million individuals. The stimulus payments will go out through the late spring and summer.

The vast majority of Americans who qualify for an economic stimulus payment will not have to do anything other than file their 2007 individual income tax return to receive their payment this year. They will not have to complete applications, file any extra forms or call the Internal Revenue Service to request the payment, which is automatic. The IRS will determine eligibility, figure the amount and issue the payment.

Stimulus payments will be direct deposited for taxpayers selecting that option when filing their 2007 tax returns. Taxpayers who have already filed with direct deposit won't need to do anything else to receive the stimulus payment. For taxpayers who haven't filed their 2007 returns yet, the IRS reminds them that direct deposit is the fastest way to get both regular refunds and stimulus payments.

Basic Eligibility

The IRS will use the 2007 tax return to determine eligibility and calculate the basic amount of the payment. In most cases, the payment will equal the amount of tax liability on the return with a maximum amount of $600 for individuals ($1,200 for taxpayers who file a joint return) and a minimum of $300 for individuals ($600 for taxpayers who file a joint return).

Even those who have little or no tax liability may qualify for a minimum payment of $300 ($600 if filing a joint return) if their tax return reflects $3,000 or more in qualifying income. For the purpose of the stimulus payments, qualifying income consists of earned income such as wages and net self-employment income as well as Social Security or certain Railroad Retirement benefits and veterans’ disability compensation, pension or survivors’ benefits received from the Department of Veterans Affairs in 2007. However, Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.

Low-income workers who have earned income above $3,000 but do not have a regular filing requirement must file a 2007 tax return to receive the minimum stimulus payment. Similarly, Social Security recipients, certain Railroad retirees, and those who receive the veterans’ benefits mentioned above must file a 2007 return in order to notify the IRS of their qualifying income.

The IRS emphasized that people with no filing requirement who turn in a tax return to qualify for the economic stimulus payment will not get a tax bill. People in this category will not owe money because of the stimulus payment.

Additional Payments for Parents and Others with Qualifying Children

Parents and anyone else eligible for a stimulus payment will also receive an additional $300 for each qualifying child. To qualify, a child must be eligible under the Child Tax Credit and have a valid Social Security number.

Limitation

To be eligible for a stimulus payment, taxpayers must have valid Social Security numbers. Anyone who does not have a valid Social Security number, including those who file using an Individual Taxpayer Identification Number (ITIN), an Adoption Taxpayer Identification Number (ATIN) or any other identification number issued by the IRS is not eligible for this payment.

Both individuals listed on a married filing jointly return must have valid Social Security numbers to qualify for a stimulus payment.

Eligibility for the stimulus payment is subject to maximum income limits. The payment, including the basic amount and the amount for qualifying children, will be reduced by 5 percent of the amount of income in excess of $75,000 for individuals and $150,000 for those with a Married Filing Jointly filing status.

Individuals who pay no tax and who have less than $3,000 of qualifying income will not be eligible for the stimulus payment.

The best sites for finding bank money market rates are those sites that keep it simple and include comprehensive up-to-date information. Surprisingly, Bankrate.com fails both test miserably. Bankrate.com forces the user to go through menu after menu to finally find a money market rate table that is not sorted by the highest rates and worse of all does not include all the banks listed on other sites. Sites where a savings investor can find a high yielding bank money market account include:

Money-rates.com

Bankcd.com

Bankaholic.com

Other sites that are not as comprehensive but with good information on bank money market rates include:

Emoneycentral.com

Gotalkmoney.com

Banx.com

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Wells Fargo & Company announced that it has taken a $39 million loss on Structured Investment Vehicles (SIVs) which were used in the portfolios of a number of their money funds. The $39 million is not devastating to company who holds over $106 billion in money market mutual funds, but is another example of money fund managers extending their risk tolerance to grab extra yield in an investment that most investors consider completely safe.

Investors have relied on the historically-stable $1 net asset value that all money market mutual funds quote without much thought of their mutual fund company "breaking the buck". However, when companies like Well Fargo, Bank of America, and State Street Boston are forced to infuse cash into their money funds to stablize the returns then investors need to consider just who is standing behind the $1 price on their money fund as the higher yielding money funds may hold riskier more volatile holdings than those funds yielding less. Fund managers have a lot more discretion than investors may expect in a conservative money fund and have been tempted by the lure of higher yields into mortgage securities and complex investments like the SIVs that have lost value and liquidity. With interest rates falling and competition for cash always intense, fund managers may continue this trend despite the negative publicity generated by companies who have propped up their money funds. Investors with a money fund backed by a large financially strong company may be in a better position to expect their mutual fund to hold a $1 net asset value through any financial catastrophe. The four funds listed below are from large respected companies:

AARP Money Market Fund (3.43% effective yield)

Fidelity Money Market Fund (3.47% effective yield)

TIAA-CREF Money Market Fund (3.65% effective yield)

Vanguard Money Market Fund (3.77% effective yield)

These four companies are not at the top of a list of the highest yielding money funds, but AARP, Fidelity, TIAA-CREF, and Vanguard are four blue-chip companies very likely to stand behind their money funds in the event of financial turmoil.