Personal Finance Blog By MoneyRates - April 2009

The Treasury Department is scheduled to reset rates on the Series EE Savings Bond and the Series I Inflation Bond on May 1. It is safe to say that the new rates are not likely to generate a lot of interest from rate-savvy investors. That's because short-term interest rates and inflation are low right now, which effects both the rates on the Series EE Bonds and the Series I Bonds. The Series EE Bonds pay a fixed rate to holders with interest credited every month. Currently the rate is 1.30%, but the Federal Reserve has slashed interest rates to close to 0.00% since last November when the 1.30% rate was set. So how low will the Treasury Department go with the new rate on the Series EE Bond on May 1? That's up for debate, but predictions as low as 0.25% have been offered up. The tough part about buying the Series EE Bonds when rates are so low is that when the economy does eventually recover and both inflation and interest rates go up again, holders of the Series EE Bonds will be locked in at a terrible rate.

The news for the Series I Bond is just as bad. We know that the inflation component of the bond will be negative because inflation (as recorded by CPI) was negative for the preceeding six month period. That leaves the fixed component to help contribute to the total return. Yet, there is almost zero chance the Treasury Department will set the fixed component high enough to compensate for the -5.6% CPI loss - so new purchasers of the Series I bonds will be effectively signing up for a 0% return. A note for concerned holders: The Treasury Department does guarantee that your composite return will never be negative no matter how low inflation goes.

The solution? Consider bank savings accounts as a better alternative to a U.S. Savings Bonds. They have the same federal backing, but pay higher rates and more liquidity. You can also place more than $5,000 in a bank savings account per taxpayer, unlike a U.S. Savings Bond which has a silly cap on accounts. Check the MoneyRates.com Savings page for a number of banks offering savings accounts with yields still over 3.00%.

It almost didn't seem possible, but CD rates edged even lower over the past week, prompting the inevitable question: how low can they go? For savers who've been holding off on committing to a CD because they thought rates were already as low as they could get, the answer may be something of a surprise.

As of April 20th, 1-month CD rates were at 0.37%, and 6-month CD rates were at 1.53%. These numbers were down from 0.47% and 1.67%, respectively, a week earlier. How did they go from low to lower?

The Consumer Price Index (CPI) release was probably a big factor. Word that prices had declined by 0.4% over the prior year gave interest rates additional room to fall. Also during the past week, the Conference Board announced that leading economic indicators signalled a continuing decline in the economy. The best the Conference Board could do by the way of good news was to say that at least the rate of decline might be slowing.

Low inflation and recession both encourage interest rates to fall. So, while today's CD rates might be low, they are consistent with the economic environment. Therefore, it might make sense to lock up the best CD rates you can today -- unless you want to bet on on quick economic recovery.

In baseball, "small ball" is the art of doing a series of little things to score runs one at a time. While not as thrilling to the casual fan as a three-run home run, baseball afficianados recognize small ball as a way of taking control of the action, rather than waiting around for something good to happen. This kind of active, incremental approach also translates well to building up your savings.

Back during the booming stock market of the 1990s, savings accounts, certificates of deposits, and money market funds were merely an afterthought -- you might have money in them for emergencies or for liquidity purposes, but you didn't think of them as wealth builders.

Nowadays though, with the stock market providing more risk than return, those deposit vehicles deserve more attention. This means playing small ball, such as being diligent about shopping for rates. A recent look at CD rates showed there was about a full percentage point in difference between one-month and one-year CDs. Even among one-year CDs, shopping for the best CD rates could pick you up another percentage point. Similar differences can be found among savings accounts and money market rates.

The point is, when returns are hard to come by, these little differences matter a great deal. It's time to play small ball and scrap for each bit of return you can get. Otherwise, you'll be leaving money on the table.

Today is a day of panic for millions of Americans. Today is April 15th or "Tax Day". For households who are just now realizing that their checking account or savings account lacks the funds in it to pay their tax bill, viable options remain. What you can't do is procrastinate and not file your return. If you don't have the money to pay your tax bill today here are some options:

(1) Borrow - It's pretty late in the day to formalize a loan, but you can use social lending sites to formalize loans with friends, family, or even strangers to come up with the money to pay your tax bill. Social lending sites allow borrowers to set up the parameters of their loan and will track repayments to lenders. Setting up a loan can be done quickly and securely. Even better, the rates from social lending sites can also be very competitive. It's never fun to ask to borrow money, but a social lending site will make it easier.

(2) Credit Card - The IRS will allow you to make a payment on your tax bill with a credit card through authorized payment processing companies. The payment is processed immediately and efficiently, but you will be charged a 2.49% fee based on the amount of your tax bill. Of course, you will also have to contend with the credit card balance remaining on the account and getting charged interest as well. Some credit cards will offer rewards for all purchases (including tax bill payments), so it is important that you pick the credit card that offers you the best rebates, cash-back, rewards, or gifts for making payments.

(3) Installment Plan - You can tell the IRS that you don't have the money to pay your tax bill and request to enter an installment payment plan. This involves filing extra forms, paying at least a $105 fee, and then making regualr payments to the IRS. This option can be cheaper than borrowing money and paying a lender, but it also involves more time to set up and more involvement with the IRS. Check the IRS website for more information.

If you or someone you know has a tax bill that you can't pay, consider the most economical option listed above. The goal has to be file your return with a payment or a plan with the IRS. Get this year out of the way and maybe next year will be less stressful.

In many ways, it is difficult to imagine CD rates, along with interest rates on money market and savings accounts, getting much lower. Historical precedent, the unusually soft inflation environment, and Federal Reserve intervention all suggest that today's low interest rates are an extraordinary, and therefore temporary, state of affairs. However, there is at least one factor that could place still more downward pressure on CD rates and other bank interest rates.

The X-factor here is FDIC insurance rates -- the insurance premiums banks have to pay in order to have their customer deposits covered by the FDIC. Because of the cost of bank failures so far, these premiums are slated to increase by at least 300% in 2009.

How will banks afford this? You'll be sorry you asked.

Like any other businesses, banks will attempt to pass rising costs along to their customers. That means banks will have to take a little something off the top of the interest rates they offer depositors.

The big picture is that this is just one reminder -- and there will be many more -- that government safety nets, while comforting, are not cost-free.

On a more specific level, it's another reason why savers should shop diligently for CD rates and the best deals on money market and savings accounts. The FDIC insurance hike will affect different banks in different ways, so people will need to pick and choose to minimize this latest squeeze on interest rates.