WHERE SHOULD I KEEP MY CASH – if not under the mattress?? By Christina Mae Olson, CFP®
This recession has made us more cautious. We are hanging on to more of our money these days. Americans currently save at a rate of 3.5% and this is predicted to go even higher. In 1980 – the middle of another horrible recession – we were saving at a rate of 10%. This rate declined steadily until 2008 when we were actually not saving anything. In fact, we were spending 104% of our earnings. And now, for the first time since 1952, we have also reduced our household debt! Where are we parking the extra cash? Certainly, not in the mattress or a cookie jar in the kitchen cupboard!
A good financial plan calls for accumulating at least six months of living expenses in a cash account. You never know when you will need the extra cash. Don’t rely on credit card spending limits for your emergency fund. These funds should be liquid and readily available. The trouble is, however, cash is earning horrible rates of interest now. You’ll be lucky to get more than 1% on your bank or credit union savings accounts. No one wants that much money sitting around earning such an anemic amount of interest.
The first place I start when evaluating financial products is at Bankrate: http://www.bankrate.com. Bankrate will search the country for the highest rates on CD’s and bank savings accounts. Bankrate also provides information on the financial health of banks so you can steer clear of the ones in trouble. The best rate on a 3-month CD is 1.54% at Beal Bank. Yikes, that’s a pretty dismal return. Locally, Firefighter’s Credit Union is paying 1.05% on their 91 day CD. River Bank is paying 1.25% on their 91 day CD. You have to go out 11 months (not suitable for an emergency fund) at Coulee Bank to get a tad better rate. Their 11-month CD pays 1.52%. Coulee Bank pays .25% on their conventional savings accounts. What is one to do with such horribly low interest rates? There must be something better out there!
A few area banks offer high interest “Rewards Checking” accounts. Coulee Bank: http://www.couleebank.net offers a whopping 4.04% interest rate on your deposits up to $25,000 if you agree to a certain set of “green” rules. This type of e-bank account is becoming more popular. Altra Federal Credit Union: http://www.altra.org offers “A-Plus Checking” paying 4% up to $25,000. Even COOP Credit Union in Galesville (Black River Falls): http://www.coopcu.com pays 4.35% on their Rewards Checking accounts. You must agree to get your statements on-line (reducing paper waste). You must use their debit card at least 12 times each month. You must set up at least one recurring auto deposit or auto debit from your account. There are membership requirements for both Altra and COOP CU but these are very liberal for those living in the La Crosse area. You may qualify.
I spoke with a member services representative at Coulee Bank on 8/19/09. She said that anyone in the country (hello to my readers from out of state) can open a Rewards Checking account with them. You can apply on line and never have to set foot in Wisconsin to take advantage of this account. She also told me that they have no plans to adjust the 4.04% interest rate. The last time it changed was in July, 09. Deposits at banks and credit unions are now insured up to $250,000 through either FDIC or NCUA until 2013.
There are some worthwhile mutual fund options if you are willing to slightly step up the risk. Mutual funds are not FDIC or NCUA insured like bank or credit union accounts. Short-term bond funds provide a higher dividend yield than conventional bank or credit union accounts. The “short term” means that the bonds in these funds have a short maturity. Much like short term bank CDs – short term bonds carry little “interest rate risk” because your money can be reinvested at the new rate once the bond comes due. Short-term CD’s and bond funds are a good idea if you believe interest rates will be moving higher in the near future. I do believe interest rates (inflation, mortgage, credit card, lending) are moving higher. The Vanguard GNMA Fund (ticker: VFIIX) is paying a current yield of 3.99%. If you keep your dividends invested – the cumulative yield is 4.51%. This fund is a government insured bond fund and carries very little risk. The Vanguard Short-term Investment Grade Bond Fund (VFSTX) is paying 3.18%. Reinvest your dividends and the return is 4.41%.
Morningstar (http://www.morningstar.com) is an independent investment rating firm. You can use their research tools for free. They evaluate stocks, bonds, ETF’s (exchange traded funds) and mutual funds. I always start at Morningstar to see if my selection is highly rated. Morningstar rates the Vanguard GNMA Fund at their highest: 5-stars. This fund is also classified as taking very low risk in achieving its goals. The Vanguard Short-term Investment Grade Bond Fund is rated 4-stars. You can also evaluate the various expenses related to mutual funds at Morningstar. I like the Vanguard funds because of their extremely low fees. Vanguard is, of course, a no-load mutual fund company. There are never any sales charges incurred for buying their mutual funds. If you hold your cash in one of these bond funds – you won’t have the hoops to jump through to remain qualified for the higher interest rate like you do with the Rewards Checking bank accounts. Go to http://www.vanguard.com to easily buy these mutual funds.
There are options out there for your extra cash that pay pretty high interest and dividends. Don’t keep your money in a savings account that pays less than 1% when you can get much more. These days, every penny does make a difference!
Chris Olson is a licensed financial planner with a fee-only practice. You may contact her at CMOney@centurytel.net or 608-525-9818.
If you have comments on this article, please send them to Chris at the email address above, NOT to the LGBT Newsletter.