Personal Finance Blog By MoneyRates - February 2010
February 26, 2010
There are two main benefits of investing in certificates of deposit: simplicity and safety. And in this world, these two benefits are worth an incredible amount. There is no price you can put on knowing you're not going to lose your life savings because some Wall Street guys thought they were clever.
However, simplicity and safety are obviously not the only thing you want out of an investment. You also want a return on your money.
The reality of low interest rates on CDs is in fact being used to sell other investment products. Including:
-- Mutual funds
-- Penny stocks
-- Municipal bonds
-- Corporate bonds
Salespeople hawking these products typically use "it's a better return than you'll get on a CD" as part of the sales pitch. This hits home with many conservative investors who are frustrated by lack of yield on CDs.
While it may be wise to diversify part of your savings into higher risk, potentially higher reward investments, it is vital to always remember the higher risk part of the equation.
CD interest rates may be low for now, but simplicity and safety are nonetheless highly valuable things.
Posted in: Miscellaneous
February 24, 2010
This anger is understandable. The federal government and the entire Wall Street apparatus have mutually conspired to do everything they can to keep interest rates low.
The fact that these measures have been taken to help the economy is wearing thin as an excuse for why bank rates on deposit accounts are so consistently meager. For the senior who relies on that income to pay expenses, the reasons for low interest rates do not matter so much as the reality that rates this low do not produce sufficient income.
In this situation, some seniors are considering peer-to-peer lending through Web sites such as Prosper.com and LendingClub.com. These sites facilitate transactions where people can lend money directly to other people, at fixed interest rates and with a degree of process involved.
Seniors who are considering peer-to-peer lending as a way to get more income coming through the door should be careful to understand the stark, potentially dangerous difference between a CD and a peer-to-peer loan.
A CD is protected by FDIC insurance. A loan is exactly that: a loan--meaning that there is a chance it will not be paid back.
Nevertheless, many seniors are smart to at least consider the potential upside of getting a higher interest rates on your money by extending small personal loans to verifiably creditworthy borrowers.
February 24, 2010
Consumer confidence -- or the lack thereof -- took center stage yesterday, as an unexpectedly low reading led to a sharp sell-off in the stock market. As with any sign of economic weakness, this could delay the recovery of bank rates.
The Conference Board takes a monthly survey of consumer confidence, and the February reading saw the index level drop from 56.5 to 46. The consensus expectation was for a mild drop to around 55, which is why the stock market reacted so severely to the actual release.
While the immediate impact was felt in stocks, this news also affects bank rates. Things like CD rates, savings account rates, and money market rates won't begin to rise until economic demand strengthens. In particular, increased borrowing would be a key factor in encouraging banks to offer higher rates on deposits, and the consumer confidence figures show little appetite for borrowing among consumers.
If there is a silver lining in this, it is that caution on the part of consumers could ultimately lead to a longer, more fundamentally sound recovery. After all, much of the economic growth in the past decade was based solely on increased borrowing, a trend which reached its limits and resulted not only in a recession, but in a financial crisis triggered by bad debts.
Over the course of the recession, consumers have been rebuilding their balance sheets. In the long run, that could set the stage for more solid financial growth. In the meantime though, that is cold comfort for depositors who've already waited long enough for higher bank rates.
February 22, 2010
Last week, China raised its reserve requirement ratio for large banks. The move was noteworthy because it is a tactic designed to slow growth -- something it's hard to imagine U.S. policymakers doing. However, China's action may be an example of how policymakers can lead rather than follow.
According to a New York Times story, China's move had similarities with recent actions taken by Australian and Indian authorities to ease back on the growth throttle a little bit. In essence, by raising reserve requirements and/or raising interest rates, central bankers can restrict lending and thus check the pace of economic growth.
Why would anyone want to do that? Most prominently, central bankers are concerned with inflation. If inflation is starting to percolate, easing back on growth can cool it down a little. Also though, reining in lending activity can reduce the extent to which economic growth is based on debt and speculation -- a lesson that seems to have eluded Alan Greenspan in his tenure as U.S. Fed Chairman.
Toward the end of the last century and the beginning of this one, the U.S. economy was blessed with low inflation. For this reason, Greenspan saw his way clear to foster stimulative monetary policies. Unfortunately, low bank rates and high degrees of financial leverage meant that much of the apparent growth in the economy over the past decade was based on debt and speculation. This inevitably proved unsustainable, and we are still paying the price for that illusory economic policy.
What does this have to do with your CDs, savings, and money market accounts? Simply this. You may see some disruption in the financial markets whenever current Fed Chairman Ben Bernanke hints at more restrictive monetary policies. However, acting on those hints should ultimately make your deposits more secure and bank rates higher.
Posted in: Miscellaneous
February 18, 2010
The phrase "credit crunch" may seem, for the moment, like a relic of 2008. But upon closer inspection, it is clear that credit is not flowing freely whatsoever. This could lead to higher interest rates on CDs, money market accounts, and savings accounts if banks can figure out a way to put those deposits to good use in their lending operations.
Although the economic environment is certainly still bleak for businesses, the possibility that American businesses will once again enjoy success creates a perpetual need for banks to provide capital to budding entrepreneurs. After all, this is the American dream: to own your own shop, work for yourself.
In order to fund these new ventures, banks will need deposit money. Two years ago, banks could get money through a variety of "creative" methods. Today, those creative methods have by and large dried up.
Many banks are going back to basics: holding money on deposit, and then looking to lend out that money at a profit. If businesses can prove they can pay back these loans, banks will undoubtedly want to be in on the action.
An improvement in the condition of American businesses (and any other businesses, for that matter) would thus be great news for the conservative investors who have money in CDs, money market accounts, and savings accounts--that money would be in high demand again, leading to higher interest rates on deposits.
Posted in: Miscellaneous