Personal Finance Blog By MoneyRates - September 2011
September 26, 2011
A recent study indicates that younger investors are especially concerned about their financial futures. Could this pessimism actually be a good sign for the future course of retirement saving?
Concerns higher among younger investors
The study in question was conducted by the Spectrem Group and compared concern levels of the general population with those of people aged 54 or younger--that is, 10 or more years away from retirement age.
The precentage of respondents who said they were worried about a particular aspect of their financial futures was higher in the younger age group for each of the five categories surveyed. The areas of concern people were asked about were rising interest rates, losing a job, financing education, getting adequate financial advice, and meeting short-term obligations.
Good news/bad news explanations
Why are people with more time until retirement especially worried? Well, you could put a positive or a negative spin on this.
The positive spin would be that younger people have been taught a valuable lesson by the financial crisis and the mistakes of their older peers. They understand that personal finance is serious business, and this will lead them to focus on it earlier and more diligently than many of the early baby boomers have done.
The more cynical explanation is that the younger you are, the more there is to be pessimistic about. Those with fewer years in front of them have less to plan for, and thus less to worry about.
A curious view of interest rates
An curious aspect of the study was that 52 percent of the overall respondent population, and 55 percent of the 54-and-under age group, cited rising interest rates as a concern. This suggests that most people view themselves more as borrowers than as savers. With rates on savings accounts, money market accounts, and CDs near zero, anyone who planned on being a net saver over time should be rooting for interest rates to go up.
This survey suggests most people view themselves as net borrowers, who would root for lower interest rates. That's not an optimistic view of the financial future!
Posted in: Savings Accounts
September 26, 2011
Interest on savings accounts is nothing to get excited about these days, but a recent tumble in gold prices is just the latest example of why the safety of savings accounts is extremely valuable.
Gold has tumbled by more than 10 percent over the past two weeks. Against that backdrop, CD, savings, and money market rates of around 1 percent suddenly look much more attractive.
The value of safety
Of course, gold is not the only example of an investment bubble that has abruptly burst. In fact, investors should be used to this pattern after the past dozen years. Dot-com stocks, real estate, and oil prices have all seen spectacular boom-and-bust cycles over that period. Gold may be on its way to becoming the latest investment to follow this course.
What's different about gold, however, is that it is often touted as a save haven in troubled times. The fact is, though, that the value of gold is highly dependent on price speculation. After all, it doesn't produce income or have any guaranteed price level. Its price fluctuations create opportunities to make money, but also the risk of losing money.
What's especially striking about the recent decline in gold prices is that it comes in the context of fears about the deteriorating financial situation in Europe. This underscores the fact that gold is not really a safe haven in times of trouble. It can be exposed to some of the same systemic risks as stocks and other financial instruments.
Accentuate the positive
On the other hand, you have the true safety of CDs, savings, and money market accounts. It's true that average interest rates on these accounts have shrunk to a fraction of 1 percent, except for long-term CDs, which pay a little bit more. However, the volatile investment environment has redefined what a good return is. These days, any positive return is a good thing.
You can accentuate that positive by shopping for CD, savings, and money market rates. That can allow you to add about a percent over average rates--no small victory in a climate where positive returns are scarce.
Posted in: Savings Accounts
September 23, 2011
Like a much-hyped movie that flops on its opening weekend, the Federal Reserve's latest attempt to revive the economy--the so-called Operation Twist--received a resoundingly negative reaction upon its announcement on September 21.
In just an hour and a half of trading after the announcement on Wednesday afternoon, the Dow Jones Industrial Average dropped by more than 200 points. It lost another 400 points by the end of trading on Thursday. In all, that's a market tumble of more than 5 percent in just over 24 hours.
With the decision to sell $400 billion in near-term Treasury bonds to purchase the same amount of longer-term bonds, the Fed said it hopes to hold down long-term interest rates and produce a more accommodating atmosphere for business. But the news didn't seem to strike investors as they hoped.
So why did the Fed announcement bomb so completely?
The burden of high expectations
To a large extent, the Fed suffered from the burden of high expectations. It's hard to fathom what the market expected them to pull out of the hat when their options are so limited. Short-term interest rates are already near zero. Current mortgage rates--a focus of Operation Twist's attempt to bring long-term rates down--are already at record lows and have been well below historical norms for some time.
In other words, while the Fed can manipulate interest rates to some degree, two things were already clear before Operation Twist was announced:
- The Fed has essentially run out of room to push rates down any further.
- Lower rates have not stimulated spending.
Still, the market was clearly expecting something better than Operation Twist and expressed its disappointment with a sharp sell-off.
Twisting the knife
The Fed may have added to the problem with the way it announced Operation Twist. Both in the wording of the announcement and in its increasingly gimmicky initiatives, the Fed has contributed to an atmosphere of rising panic. It is getting sucked into the short-term focus of the markets rather than reinforcing the ways that economic cycles tend to resolve themselves.
Ultimately, these style points didn't do the real damage, but they may have twisted the knife a little.
For those with savings in CDs, savings accounts, and money market accounts, Operation Twist is largely a non-event. It is, at least, an occasion to appreciate that even minuscule savings and money market rates are better than being in a sinking stock market. Operation Twist won't help those rates, but with its emphasis on bringing down longer-term interest rates, it shouldn't hurt short-term deposit rates any further.
As for the economy as a whole, in the long run Operation Twist might be like one of those movies that bombs upon its initial release, but later goes on to become a well-regarded classic. For now though, critics and the general public agree: Operation Twist is a flop.
Posted in: The economy, the Fed, and interest rates
September 21, 2011
According to the Wichita Eagle newspaper, the amount sitting in the insured accounts in the first six months of 2011 totals $9.8 trillion--an all-time high.
The size of the deposits is less a reflection of a newfound interest in saving as it is a lack of other investing options. Investors are worried about the recent volatility of the stock market, and businesses with deposits are leaving money in the bank rather than hiring or expanding due to concerns about the economy.
Like even the best CD rates and the best savings accounts, the interest rates on other investment tools, such as government or municipal bonds, are too low to be enticing, the Eagle said.
Banks are normally thrilled to have large deposits because they make money by lending the money out and charging interest. But the current situation is different; demand for loans by both consumers and businesses is weak, and the banks' ability to make money by investing the deposits in bonds is limited because of low interest rates.
In fact, the large deposits and dearth of loan applications may be costing some banks. For instance, the Bank of New York Mellon, which handles deposits for large industrial clients, recently told its customers it was going to charge--yielding, in effect, a negative interest rate--for balances larger than $50 million. Idle deposits also cost so-called retail banks--such as the ones you and I use--in FDIC insurance fees and other expenses.
The investing website Motley Fool argues that people who stick their money in a checking, savings or money market account rather than investing it are making a big mistake--even when the market is uncertain. The Fool notes that leaving your money idle means its value is being eroded by inflation and taxes.
Posted in: Personal Finance
September 20, 2011
Even if you're getting the best CD rates on the market and you have one of the best savings accounts or money market accounts available, you may still be feeling a little dissatisfied. With savings accounts paying 0.15 percent and 1-year CDs paying just over 1 percent, some may be wondering if there is a more lucrative place to put their retirement savings.
According to istockanalyst.com, the current average national rate for CDs is 0.86 percent, and although it poses no stock market risk, that kind of return poses what's called "purchasing power risk." What that means is that even with the best CD rates you can find, inflation is going up at 3.6 percent--meaning your money is in essence losing value while it sits in the certificate of deposit.
Your only option if you want to boost the balance in your savings accounts or checking account is to take on some level of risk. Here are three of the safest options:
- A money market fund. This is a type of mutual fund that invests in low-risk securities and which, according to the Securities and Exchange Commission, pay dividends that reflect short-term interest rates. These accounts are not federally insured.
- Municipal or corporate bonds, which are typically less risky than stocks. According to Investopedia, bond investors like the periodic payment structure of bonds rather than the possibility that they'll lose money if a stock goes down. Of course, by not investing in stocks, you lose the profits that come with a soaring stock market, so that's why most successful investors divide their investments in to both categories.
- One of the safest, but lowest-paying, bond options is U.S. Treasuries. Although there were questions about the U.S. government's ability to cover its own debt payments during the debt ceiling debate, many investors flocked to Treasuries to avoid fluctuations in the stock market, and demand for T-bills went up.
Some advisors, including Kiplinger's magazine, recommend that conservative investors spread their money around to different safe havens, from U.S. Treasury bonds to CDs and even an online savings account, which will pay a higher interest rate than a traditional bank.
Posted in: Personal Finance