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Personal Finance Blog By MoneyRates - July 2010

Declining Profit Margins a New Threat to Bank Rates

July 28, 2010

| MoneyRates.com Senior Financial Analyst, CFA

It's a delicate balance. Sometimes banks want to attract deposits in savings accounts, money market accounts, and CDs. Other times, those accounts can be almost a liability. According to a recent story in US Banker, now is one of the latter times, when some banks may actually shun new deposits.

No, that doesn't mean you have to give back the toaster, or whatever incentive you may have been given to open an account, but it is yet another reason you might be seeing low savings, CD, and money market rates.

MoneyRates.com has previously described how the absence of profit opportunities for banks (due to a weak loan environment, tighter investment restrictions, and higher costs) takes away from the incentive for banks to offer higher interest rates to attract deposits. Now it seems that for some banks, those deposits are actually becoming a drag on profitability.

A couple years ago, when banks found themselves over-extended in terms of loans relative to deposits, they sought new deposits to stabilize their balance sheets. Now the ratio of loans to deposits has tipped in favor of deposits in many cases. That's good for stability, but bad for profit margins. It represents a large capital base that cannot be fully utilized for profits in the current environment.

In finance parlance, this means some banks consider themselves currently under-leveraged. This means that those banks may want to actively discourage further deposits for the time being.

Bank accounting is an odd world, but it's important to remember there are thousands of banks out there, each with its own unique accounting situation. Therefore, while some banks aren't hot on the trail of deposits, it is worth looking for those that are. That is where you will find the best CD rates, money market rates, and savings account rates.

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Emergency savings accounts need a boost, study finds

July 27, 2010

By Barbara Marquand | Money Rates Columnist

About a quarter of Americans think the economy and their personal financial situations will be worse this year than last year, according to The 2010 MetLife Study of the American Dream released July 26.

That sounds pretty grim, considering how bad the last couple of years have been.

But the results actually show significant improvement over last year when 44 percent expected conditions to worsen. Apparently most people believe the economy and their finances have finally bottomed out, and in this tough environment, that's about as good as the news is going to get.

About 41 percent of study respondents this year believe the U.S. economy and their personal financial situations will stay the same and one-third think the economy will be better this year. Most people, though, think full recovery is still three or more years away, and many feel like they're living close to the edge, MetLife says.

Savings Accounts Lacking

A troubling 45 percent don't think they could take care of expenses for more than a month if they lost their jobs, and 65 percent say they could not cover expenses for three months. More than half, 55 percent, are worried about losing their jobs. Two-thirds don't think they have an adequate safety net, including enough emergency savings, insurance and retirements savings, according to MetLife.

Financial experts advise maintaining an emergency savings account to cover at least three to six months of expenses in case of a job loss. Emergency savings should be held in liquid investments, such as savings accounts, money market accounts or CD ladders -- multiple certificates of deposit with staggered maturity dates to provide regular access to cash.

Not surprisingly, a lot of people are stressed out. Almost half of respondents, 45 percent, say concerns about making ends meet are keeping them up at night, and 52 percent are feeling more job stress.

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Earnings Send Disappointing Signals for Bank Rates

July 26, 2010

| MoneyRates.com Senior Financial Analyst, CFA

Indications from second quarter earnings releases are that banks are continuing to suffer from bad loans tied to the real estate sector. That's bad for banks, and in this case, what's bad for the banks is also bad for bank customers.

Money market rates, CD rates, and savings account rates continue to bump along at extremely low levels. If bank earnings continue to be sluggish, it gives banks little incentive to start boosting bank rates. More specifically, if lending continues to be a troubled business for banks, there won't be any rush to offer higher bank rates to attract the deposits that fund new loans.

The fact that banks' earnings woes are still being tied to the real estate slump may carry even more ominous implications than the fact that bank rates may stay low for a while. There has long been a concern in the marketplace that real estate may be in for another leg downward, especially now that homebuyer incentives have expired. If this happens, the question becomes one of how profoundly those troubles will shake the stability of the banking system.

As of yet, there has been no repeat of the systemic problems which threatened the banking industry in 2008. In fact, an optimist's view of this earnings season could be that it is a form of progress when earnings reports are disappointing because growth is sluggish, as opposed to earnings representing severe losses. Still, it looks like it will still be a while before the banking industry can breathe a sigh of relief -- and an equally long while before bank rates start heading upward.

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Where Bank Rates Fit Into the Stimulus vs. Fiscal Discipline Debate

July 21, 2010

| MoneyRates.com Senior Financial Analyst, CFA

The breaking of a filibuster yesterday paved the way for a further emergency extension of unemployment benefits. The debate over those benefits was the latest example of a larger debate concerning which of two major economic problems should get priority now: the faltering recovery, or the federal budget deficit.

Savings account rates, money market rates, and CD rates all have a direct stake in this. Fiscal stimulus, if successful, could hasten the return of more normal bank rates -- i.e., bank rates several percentage points above current levels. On the other hand, letting the deficit continue to soar out of control would have dire consequences to depositors in the form of inflation, fiscal instability, and a crippling of future economic policy.

Both sides of this argument have valid economic arguments. People in favor of stimulus believe that without reviving the economy, the government will never see the growth in tax receipts necessary to close the deficit. On the other hand, those concerned about the deficit point out that if America continues to borrow while much of the world is turning toward fiscal discipline, it may be tougher (i.e., more expensive) to get other nations to buy our debt instruments in the future.

While the debate on unemployment benefits shaped up largely as Democrats on the side of stimulus and Republicans on the side of discipline, the larger debate is less clear-cut than that. Many traditionally Republican business interests have championed the cause of further stimulus.

Further stimulus might help the immediate problem, but the economic policies of the past decade have largely been based on short-term solutions, and look where they have led us. Perhaps it is time to take a longer-term approach.

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Will Your Retirement Savings Run Out?

July 20, 2010

By Barbara Marquand | Money Rates Columnist

Delaying retirement is sounding better and better -- or at least smarter and safer -- given the growing number of studies showing so many of us aren't saving enough for retirement.

Among the latest are findings by the Employee Benefit Research Institute (EBRI), which says a dramatic percentage of people -- even those in upper-income brackets -- are going to run short of money after they quit working.

The EBRI's recent analysis finds that almost two-thirds of Americans in the two lowest pre-retirement income levels will be short of money after 10 years of retirement. One-third of people in the next-highest income level will be short of money after 20 years in retirement, as will 13 percent of people in the highest-income level.

The risk is about even among age groups. Almost half of early Baby Boomers, those ages 56 to 62, are at risk of running short of money in retirement, and about 45 percent of Generation X'ers, those ages 36 to 45, and 44 percent of late Boomers, ages 46 to 55, face that same risk.

Savings Rates Need Improvement

This is the first time a national rating model has gauged when different age and income groups of Americans will run out of their retirement savings.

What exactly does running short of money mean? We're not talking about having to skip the 90-day cruise or giving up the vacation home. The EBRI says it's basing projections on meeting basic living expenses as defined by the Bureau of Labor Statistics' Consumer Expenditure Survey and health care expenses.

The problem stems from a variety of factors. Many people underestimate how much money they'll need when they retire, and some just aren't able or willing to set enough money aside. Dented stock portfolios, lower home values, and bottomed-out money market account and CD rates for cash investments don't help, either.

As a result, a growing number of aging Baby Boomers are continuing to work, and some early retirees are looking for jobs -- not a bad idea, considering the current state of affairs.

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