CASH AND SAVINGS GOT YOU DOWN? By Christina Mae Olson, CFP®

Our economy is experiencing a little turbulence. Some say we are in a recession. Some say it’s “stagflation” – a combination of recession and inflation occurring at the same time. The credit crisis with sub-prime mortgages and other financial products is continuing. Foreclosures are up as are bankruptcies. The federal government reacts to all this by lowering interest rates. This makes it cheaper to borrow money and should, in theory, take the recessionary pressure off of the economy. Whenever interest rates go down, however, this negatively affects savers. Our checking and savings accounts and money market funds are paying very low interest rates. When our CD’s come due – we can’t reinvest them at decent rates. Our interest and dividend income has been slashed by more than half!

Have you been paying attention to the shrinking interest you are earning on your cash accounts? Just 18 months ago I was earning over 5% in my bank savings account (Complete Savings at ETRADE BANK at www.etrade.com or 800-387-2331). Today, that same account is paying 3.01%. While much lower than last year, it is still considered one of the highest paying bank accounts available. Still, it is NOT ENOUGH FOR ME!

Your cash and other funds earmarked for emergencies should be invested in very safe places. You don’t want to risk stock market fluctuations with your “short term money.” Is your cash in the bank? Local savings accounts are paying less than 1% these days. Today (4/15/08), you can earn .52% on your savings account at Coulee Bank, .91% at Park Bank or .75% at Community Credit Union. Checking accounts paying interest are paying even less. Insured money market accounts pay a tad better: Altra Federal Credit Union pays 1.5% and Park Bank pays 2.01%. Even Vanguard’s best Prime Money Market fund is only paying 2.51% now. Inflation is at a quite high annualized rate of 4.3%. How can you stay ahead of inflation if your cash is earning less than that?

Where can you put your cash/emergency funds and also eke out higher interest or dividend payments? Here are some options to consider:

Coulee Bank’s Rewards Checking – currently paying 6.01% cumulative annual yield. This is an electronic checking account. To get the high rate – you must make 10 debit card charges each month, do a direct deposit or auto debit monthly, and agree to getting electronic statements (not paper ones). If you don’t comply with these rules – they’ll pay just .3% on your balance. I spoke with a personal banker at Coulee Bank who said they intended to keep paying the high 6.01% rate but would lower it “if interest rates were to drop drastically.” I asked her if the bank didn’t think rates hadn’t already done this and she said, “Well, probably.” They don’t have a policy in place for notifying account holders if rates are lowered but she told me the rate on Rewards Checking accounts will always be the highest available. I don’t know how they can continue to pay this 6.01% (on balances up to $25,000) but they maintain that they will.
Altra Federal Credit Union A+ Checking – currently paying 5.05%. A+ accounts require the same electronic conditions as listed above with Coulee Bank. Altra used to pay 6.12% on these accounts but lowered the rate last month. What do they know that Coulee Bank doesn’t know? Both of these electronic checking accounts are worth serious consideration.
Bond Mutual Funds. First are GNMA funds. These mutual funds own 100% investment grade, government insured mortgages (no sub-prime notes) known as Ginnie Mae’s. Next, short term bond funds are invested in either fully insured government bonds or AAA rated corporate bonds. Both GNMA’s and short term bond funds offer check writing privileges. These funds are considered nearly as safe as cash but the share price does fluctuate minutely.

Payden GNMA Fund (PYGNX) is paying a daily yield of 5.01%. This mutual fund is rated 4-stars by Morningstar (out of possible 5). Annual expenses are .5%. Payden requires an initial deposit of $5000. Contact them at 800-572-9336 or www.payden.com.
Vanguard GNMA Fund (VFIIX) is paying a daily yield of 4.75%. This is a 5-star Morningstar rated fund. Annual expenses are .21%. Vanguard requires a $3000 minimum initial deposit. Contact: 800-662-2739 or www.vanguard.com.
Vanguard Short Term Federal Fund (VSGBX) is paying 4.29%. Annual expenses of .2%. This fund is rated 5-star (highest) by Morningstar.
Vanguard Short Term Investment Grade (VFSTX) is paying 4.81%. Annual expenses of .21%. This is also a 5-star rated fund.

I am comfortable with my “cash” in any of these bond funds. They offer 90% safety. Stick with the bank or credit union if you need 100% safety. With inflation at 4.3% these days, you need to be earning at least 4.3% to stay current with your purchasing power. Keeping your cash in accounts earning less than the prevailing rate of inflation is like throwing away your money.

Chris Olson is a licensed financial planner with a fee-only practice. She has her cash in GNMA and bond mutual funds and in an ETRADE bank account. You can contact her at 608-525-9818 or CMOney@centurytel.net.