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Personal Finance Blog By MoneyRates - October 2009

Will New Bank Regulations Protect Your Savings Account? If So, How?

October 29, 2009

By Andrew Freiburghouse | Money Rates Columnist

Treasury Secretary Timothy Geithner testified before Congress this morning on the topic of new bank regulations being discussed by the Democrat-controlled Congress, led by Barney Frank of Massachussetts.

Conservative investors who are seeking to protect retirement savings are understandably interested in the outcomes of these discussions. When you have spent your life saving money in savings accounts, CDs, and money market accounts, you want that money respected and protected.

To the extent that new bank laws achieve that end, conservative investors seeking to protect retirement savings can see the point of all this.

However, it is quite unclear whether or not--and, perhaps more importantly, how exactly--the new bank regulations being proposed by Congressman Frank, et. al will protect your hard-earned savings.

The latest proposal seems to focus rather too broadly on the needs of the "financial system" overall.

But the "financial system" is merely a collection of individuals who need to know that their money is safe when they put it in a conservative location such as a savings account, CD, or money market account.

Focusing on the needs of the "end user" (the bank customer) is why the FDIC is so incredibly popular, relative to other government institutions. By protecting the above accounts up to $250,000 per depositor per account, the FDIC directly and simply addresses the saver's need for safety.

How will the new regulations protect your money?

That's the question Congress should be asking.

And the answer shouldn't be 1,000 pages long.

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"Too Big To Fail" Legislative Talk Has Disturbing Overtones

October 28, 2009

| MoneyRates.com Senior Financial Analyst, CFA

Just about everybody except bank executives with a vested interest agrees that some legislative changes need to be made in the wake of last year's banking crisis. However, legislating in the wake of a crisis is not without risk -- sometimes an overreaction can exacerbate a crisis.

In a subtle way, one has to look no farther than the low level of today's low savings account interest rates, CD rates, and other bank rates to see an example. The government has made an all-out effort to push interest rates lower as a stimulative measure in the wake of last year's difficulties. The unintended consequence is that low bank rates make it more difficult for banks to attract depositors -- and thus this limits an important source of capital to banks that are trying to rebuild their capital reserves.

More famously, the U.S. government responded to the onset of the Great Depression by passing the protectionist Smoot-Hawley act in 1930 -- and by thus isolating the U.S. economy only deepened its difficulties.

Now, House Financial Services Committe Chairman Barney Frank is advocating legislation creating extraordinary power for the government over large banks should they be in danger of failing. Some of the associated proposals -- such as wiping out the property rights of equity holders under such circumstances -- seem little more than vengeful. Worse, they could have the unintended consequence of making it impossible for banks to attract investment capital just when they need it the most.

Some anger at the banking community after last year's debacle is understandable. However, rather than taking a pound of flesh, Congress should be looking at how to structure the industry so as to reduce the likelihood of failures in the first place.

Posted in: Miscellaneous

Tagged in: banking, banks, CD rates, savings rates

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CD Laddering Can Spice Up Your Investing Life

October 27, 2009

By Andrew Freiburghouse | Money Rates Columnist

According to Money-Rates' list of the best CD rates available today, a 6 month CD at 1.5 percent interest is a good deal. At the one year mark, anything near 2 percent is a good deal. Conservative investors who vividly remember CD returns of 3-5 percent are understandably questioning how good of a deal today's best rates CDs really are.

Meanwhile, the stock market has been up approximately 50 percent since March.

Nevertheless, certificates of deposit offer one of the only government-guaranteed ways to earn money without risking the loss of any money. Therefore, when it comes right down to it, conservative investors are likely to continue buying CDs so long as they pay something more than zero percent.

Being able to sleep at night is a return on investment in its own right.

A CD Laddering Strategy Can Spice Up Your Investing Life

Few people believe that interest rates will remain this low forever. Eventually, CD rates will go up.

Problem is, many conservative investors are very, very bored in the meantime.

Laddering CDs can spice up your investing life. Laddering CDs, of course, entails buying CDs with staggered maturity dates. The mathematical benefits of laddering CDs are strong, but don't underestimate the psychological benefit.

When you have a CD coming due every other month, like clockwork, you have new money to invest every other month. Over time, even your "stock market guru" friends may become jealous of that fact.

Posted in: Miscellaneous

Tagged in: CDs, interest rates, laddering CDs

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Do You Have a Plan for Your Savings Rate?

October 26, 2009

| MoneyRates.com Senior Financial Analyst, CFA

When a recent poll by MoneyRates.com and GetRichSlowly.org showed that 52% of respondents felt their retirement savings were not on track, it wasn't a complete surprise. This has been a challenging environment. A weak job market has caused many household incomes to take a hit. The stock market has been little help to investors for a decade now. Meanwhile, low savings account interest rates and other bank rates make it difficult for conservative depositors as well.

For all the difficulties, though, the most important thing now is to plan for how you will save for retirement. Even taking into account any setbacks to date and the low level of current bank rates, it's time to come up with a revised plan.

That plan may involve a more modest retirement than you had originally envisioned. Or, it might require more sacrifices in your current budget. Either way, when times are tough, it is an especially bad idea just to let things drift.

Time can be both the friend and the enemy of retirement savers. The sooner you start saving, the better the ratio you'll have of years spent saving to years spent living off those savings in retirement. On top of that, of course, is the power of compounding. Once you start saving, the interest you earn starts contributing alongside your future savings, and that contribution from compounding snowballs with each passing year.

In short, given recent conditions, it's understandable if you've fallen a little behind on your retirement plan. However, that simply means you need to get started on a plan to catch up.

Posted in: Miscellaneous

Tagged in: bank rates, savings, savings rate

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Bank Pay at Bailed-Out Banks Slashed by Half

October 22, 2009

By Andrew Freiburghouse | Money Rates Columnist

Pay for top executives at bailed-out banks and financial institutions, including Bank of America, Citigroup, and GMAC, has been cut in half by the Treasury's compensation regulator, Kenneth Feinberg.

Banks that have already paid back bail-out funds, including JPMorgan and Goldman Sachs, will not be affected by the Treasury's orders.

Headline Not the Whole Story Here

How to restructure the banking system so that nothing like what happened in September of 2008 ever happens again is an ongoing debate. Frequently, the discussion is more political than practical.

This is unfortunate because the best outcome for everyone, especially individuals holding money in conservative investments such as money market accounts and CDs, is that safe deposit accounts are actually safe.

Within Feinberg's orders, and to that point, is the idea that top bank executive pay should be linked to long-term performance.

For example, new AIG CEO Robert Benmosche would be allowed to receive up to $7 million in yearly pay, but $3 million of that would be stock that could not be sold within five years.

The Best Bank Rates and the Best Banks

The next few years, it seems, will see considerable separation between banks who can compete in this new, government-intensive, public relations-dependent environment, and those who can't.

If you're looking for the best CD rates and the best money market rates, then, you are wise to stick with banks that unequivocally value the trust (and the money) you put in them.

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