Personal Finance Blog By MoneyRates - January 2011

Shock waves from Egypt reach the US

January 31, 2011

| MoneyRates.com Senior Financial Analyst, CFA

The Dow Jones fell 166 points on Friday, primarily due to uncertainty caused by the unrest in Egypt. However, this might say as much about the risk of the U.S. market as it does about the impact of a potential change in Egypt's leadership.

The scent of jasmine

Tunisia's "Jasmine Revolution" has inspired a boiling over of long-simmering popular dissatisfaction with Egypt's dictator, Hosni Mubarak.

As appealing as the idea of getting rid of a dictator might be to American democratic sentiments, it remains to be seen whether Egypt's revolution will lead to democracy, or whether it will be like Iran in 1979, when a secular dictator gave way to anti-Western religious extremists. The anxiety over this situation is amplified by the fact that the pattern could be repeated in other Middle-Eastern countries. In this era when news spreads quickly over the internet, revolution may be about to go viral.

In economic terms, concerns about the Middle-East naturally center on oil. Sure enough, oil prices were up Friday, but not outrageously so, and not enough to take oil out of the range it has been trading in recently. The hit to stocks reflects the fact that with a fragile economic recovery underway, the stock market is not in a good position to withstand shocks.

Potential threats to savings and money market rates

What does all this mean to depositors in savings accounts, money market accounts, and CDs? Potentially two things, both of them bad:

  • Any inflationary impact or disruption in the oil supply would be especially hard on depositors with CD, savings, and money market rates so low.
  • If these disruptions act as a drag on the economy, it could work to keep low interest rate policies in place even longer.

For now, though, it's important to remember that nothing has happened yet that would actually interrupt the flow of oil. What's going on now is a reminder that markets hate uncertainty. There's a good chance that these next few days of not knowing what will happen will be more disruptive to the financial markets than the eventual outcome.

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New bank fees will require consumers to be more vigilant

January 28, 2011

By Barbara Marquand | Money Rates Columnist

As brick-and-mortar banks continue to roll out new fees in an effort to raise revenue, an increasing number of experts are warning consumers to look for an alternative to their current checking account.

The big banks are reeling from two recent regulatory moves: new restrictions on overdraft charges and proposed new limits on debit card swipe fees. The swipe fees alone, which are expected to be capped at $0.12 per transaction this summer, could cost U.S. banks up to $23 billion a year.

They've responded with a barrage of money-making schemes, from selling advertising embedded in your online bank statement to annual fees on checking accounts and debit cards. Many banks are starting to charge for checking accounts, and many are also increasing ATM transaction fees and ATM receipt-printing services. If you've gotten used to having those check images show up in your bank statements, you soon may have to start paying for the luxury.

It doesn't end there. Banks are also talking about limiting the number of transactions you can make in a day and limiting the size of the ATM purchases you can make. Many rewards checking programs are also expected to be eliminated.

What this means for anyone who watches their money closely is that you'll have to be even more vigilant. According to The Boston Globe and Wallet Pop, here is what some of the experts are advising:

  • Consider moving to a credit union or small, regional bank. Many of these places will still be offering free checking accounts. According to the Credit Union National Association, credit union patrons pay less than half what bank customers pay in annual fees--and that was before the banks started raising fees. Car loans and mortgage rates are often cheaper there, too.
  • Get used to doing without a human teller. If you can get comfortable setting up direct deposits into your checking account or savings accounts, paying bills online and using a limited number of ATMs, it's likely that you'll save money in the long run.
  • Read the fine print. If your bank is starting to charge for your checking account, you may be able to avoid fees by maintaining a minimum balance or agreeing to a limited number of transactions per month.

Look for newcomers entering your banking market. According to a Jan. 5 Business Insider article, the flurry of new fees is going to create a demand for new banks to service all those customers fleeing the larger banks. You can benefit from this by taking advantage of introductory offers to open a checking account at those new banks.

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Ask the expert: savings accounts or money market accounts?

January 27, 2011

| MoneyRates.com Senior Financial Analyst, CFA

Q: I have a CD maturing, but I don't want to roll over into another CD right now with interest rates so low. I'd rather park the money in a savings or money market account, but that raises a question: what's the difference between savings accounts and money market accounts? Specifically, which would be a better place to hold my money while I'm waiting for interest rates to rise?

A: The prospect of rolling over a CD at today's low rates is pretty unappealing, so it is natural for depositors to look at savings accounts and money market accounts as a temporary alternative, until interest rates rise. So which is the better solution: savings accounts or money market accounts?

The truth is that in this context, the two are virtually interchangeable, and it is worth looking at and comparing both kinds of rates. Terms and conditions about how often you can access different types of accounts may vary, but in the case where you are trying to park one lump sum of money until you find a better home for it, that shouldn't matter much. So, the decision really comes down to interest rates.

In general, money market rates are higher than savings account rates. According to FDIC figures, as of late January, 2011 the average money market account rate was 0.07 percent higher than the average savings account rate. However, this margin is small enough that it is worth looking at both types of accounts, because individual savings account rates might be higher than their money market counterparts.

So, include both savings accounts and money market accounts in your search, and focus on the best rates for the size of the deposit you are making.

Got a financial question about savings, investing, or banking? MoneyRates.com invites you to submit your questions to our "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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Why you should care about Bank of America's struggles

January 26, 2011

| MoneyRates.com Senior Financial Analyst, CFA

One bank's financial results stood in contrast to the generally cheery earnings reports that have been released over the past couple weeks. Bank of America posted a loss of $2.24 billion for 2010. If you think this one exception to the improving banking sector doesn't matter, guess again.

Bank of America is not just another bank. It is the largest in the U.S., with 57 million individual and small business customer relationships. In other words, Bank of America has a disproportionately large effect on depositors and on the banking sector overall.

Still struggling

Bank of America's problems are largely a hangover from the mortgage crisis. It acquired sub-prime mortgage specialist Countrywide Financial just as the crisis was coming to a head, which was a bit like tossing an anvil into a sinking boat. They've also had to settle claims from Fannie Mae and Freddie Mac over damaged mortgages Bank of America sold them, and other investor claims could follow.

All of this has a dual impact on Bank of America. It hurts earnings now, and it keeps the bank in damage-control mode which hinders efforts to build business for the future.

Impact on depositors

So what does all this mean to the ordinary depositor--people with savings accounts, money market accounts, checking accounts, etc.? The struggles of Bank of America impact them in two ways:

  1. Continued trouble with mortgage defaults means that concerns about the stability of the banking system can't completely be put to rest. Banking has come a long way from 2008, but the Bank of America is so huge that its problems could have an out-sized impact on the rest of the industry.
  2. Being in a defensive mode influences the Bank of America to offer low savings and money market rates, and to raise fees on checking accounts. This not only affects Bank of America customers, but has an influence on the industry as a whole.

Overall, the banking sector is getting better. However, since Bank of America comprises such a large share of that sector, banking can't be said to be completely recovered until Bank of America is doing better.

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5 ways to maximize returns on certificates of deposit

January 25, 2011

By Barbara Marquand | Money Rates Columnist

CD rates maintained their downward spiral for the week ending Jan. 25, 2011 continuing a slow decline that began when the great recession started about two years ago. The average 12-month rate dropped to 0.679 percent, down from 0.698 percent from the week prior.

The low level of even the best CD rates has many investors thinking about a return to the stock market. That's fine for long-term goals such as saving for retirement or college, but the stock market may not be the best idea if you're looking for a place to stash your emergency savings accounts. If that money is designated for any kind of short-term need like this, you may be better off finding the best CD rates available or a high-interest savings account.

CDs and the market: the best advice for investing

With the new year still fresh, investment experts have been issuing reams of advice for low-risk investors who want to see their money grow but aren't interested in a full-on, stock-market roller coaster ride. Here is the best of their most recent advice:

1. Consider stashing your loot in passbook savings accounts. Some of the best savings accounts are paying 1.3 percent or more--twice the best CD rates, and the interest rates on the best savings accounts will climb as the interest rates are loosened a bit by the Federal Reserve.

2. Ladder your CDs with the best CD rates you can find. Laddering is the process of staggering the maturity dates of different CDs so at least some of your money is taking advantage of the best CD rates available at any given time. Some experts advise you to reinvest your short-term CDs in long-term accounts with the best CD rates.

3. Think about putting your money in a barbell. A barbell is a form of laddering where half of your money goes in long-term CDs and half in short-term CDs. The long-term accounts help you if the best CD rates drop, but the short-term ones will be available for you to take advantage of increasing rates.

4. Check the cash-out cost of closing a long-term CD early. Even with the penalty, you could still come out ahead by closing a long-term CD whose interest rate is below market.

5. Take advantage of bank offers. Many banks and credit unions will try to attract customers with the best CD rates. Shop around, and when the CDs mature find the banks offering the best CD rates and put your money there.

Posted in: Miscellaneous

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