PDA

View Full Version : interest rates, what is possible?



Zoe Girl
1-11-11, 4:10pm
Hi all! I am actually dealing with some financial stuff (yeah, slogging out of personal depressive state) and I am appalled at interest rates. Here are 3 things I have,

$2,000 in a mutual fund that is starting to come back (annual estimated income $28)
$16,500 in an IRA that is balanced (annual estimated income $38)
$10,000 in a credit union which partially needs to be available for emergency (at .10%)

This is crazy that nearly $20,000 and I have an earnings of under $100 a month. I at least stopped short of putting this into a losing mortgage proposition and consider this a very very basic safety net for a single mom of 3 in a low paying job category. I owe over $30K in student loans and only have one other debt and I am not going to use these funds for that because I know myself well enough to know I do not put money away monthly.

Okay, any ideas? My first idea really is CD laddering. ,I am seeing better interest rates and I can structure them to have emergency funds available. I am also not sure I understand all this because the mutual fund came up $200 in value over the last year. That may be one I want to keep as is if it is growing well even though it is a small amount.

Thanks for any advice, i am nervous about going to a financial person without self educating because they are also sales people.

kib
1-12-11, 12:41am
If you are willing to go the extra mile, you could try a high yield checking account. I have one with beacon federal that yields 4% for balances up to $20,000. It also pays about 1.8% on balances between 20K and 50K, most only pay .25% or so after the cut off. Good account, small but so-far reliable bank. Requirements: 1. you have to make 15 debit transactions a month (I fill my car with gas $1.00 at a time. :|() 2. you have to have at least one ACH or Direct Deposit. It's sort of lame but I have a recurring direct deposit set up from another bank for $15 a month so the requirements just ebb and flow $15 a month, with the balance remaining high. At present, I figure I'm earning $66 for 20 minutes worth of work. :~)

This is a pretty good list of higher-yielding checking and cd accounts. www.ratebrain.com (http://www.ratebrain.com) It does include some accounts that are only available to certain people or in certain states, though.

The Beacon website is : http://www.beaconfederal.com/web/promos/RewardsChecking

The best rate I've found for a cd is with Connexus Credit Union. A somewhat complicated process, but 3% for 5 years. The other 3% accounts are all for 10 years. Which ... who the hell knows, might turn out to be a great lock-in. Siiiiigh. !pow!

ETA: Beacon's internet interface ... um, sucks. Call them.

Jonathan
1-12-11, 10:08am
Rates are just low right now. If you goal is safety, you shouldn't be too concerned with return.

That said, what of that $10K is e-fund and what should be invested elsewhere? You could consider splitting that into appropriately sized chunks and investing part of it for a higher yield.

rosarugosa
1-12-11, 10:26am
Our e-fund is in ING, where we're earning 1%, which isn't much, but is 10 times more than .10%. We can access it within 3 days, which is readily accessible enough. We could always use a credit card to hold us over for that three days, if we had an emergency auto repair or something.

Rogar
1-12-11, 12:38pm
I am equally as dismayed. I have split my savings half, with half in a money market and half in a 2 year CD. I keep thinking that interest rates will be going up, and as such have not wanted to go longer than 2 years. Then again, I've been thinking that for a long time. There are ways to squeeze a little more out of things by chasing higher yield banks and enticing special deals, but I've figured it just not worth the extra trouble and I like my bank. For what ever my humble opinion is worth.

ljevtich
1-12-11, 1:58pm
...

$2,000 in a mutual fund that is starting to come back (annual estimated income $28)
$16,500 in an IRA that is balanced (annual estimated income $38)
$10,000 in a credit union which partially needs to be available for emergency (at .10%)
... I at least stopped short of putting this into a losing mortgage proposition and consider this a very very basic safety net for a single mom of 3 in a low paying job category.

So you do not have a mortgage right now correct?



I owe over $30K in student loans and only have one other debt and I am not going to use these funds for that because I know myself well enough to know I do not put money away monthly.


First off, the real money that you have to move into investing is:
$2K - mutual fund
portion of your emergency fund - you should have at least 6 months available as liquid funds.
$16.5K is an IRA.

First off, figure out what part of your emergency fund is really available for investments.

Second, what is the interest rate on your school loans and your other debt? You can use a portion of your IRA to pay off your school loans and I would suggest that rather than looking to do some investing. Thing is, how much of the IRA is interest and how much is what you put in? You can only take out what you put into the IRA, not the interest, otherwise you will be hit with fees.

I would strongly suggest paying off your debt before considering investing. The only kind of investing that I would do would be if your employer allows 401K investing where they are helping you invest. Otherwise, both Dave Ramsey and YMOYL both suggest paying down the debt first.

Spartana
1-12-11, 5:29pm
I ended up putting all my "house money" (the money I recieved after I sold my paid off house) into a Money Market Savings account instead of CDs like I had planned because the MM got more interest than the CDs! Plus I could access it whenever I wanted unlike CDs. The low interest rates are really the defining factor in choosing to buy another place now rather than wait like I had planned. With my money not earning much (1%), I might as well take advantage of the low housing prices.

ljevtich
1-12-11, 8:20pm
While the interest rates right now with banks may be measly, I believe it will be going up. I look on a daily basis of the 30 year bond interest rates and prices. And they are looking good!
Bloomberg Bonds (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/): So a 30 Year Bond bought tomorrow - you want to invest $10,000 you only have to pay 9,500 and change - for a $10K investment! The interest rate though, that you will get every 6 months will be at 4.25% - so on a 10K investment, it would be $212.50 or $425 a year. This is not reinvested back, this goes into your pocket. While it is not as fabulous as when the writers of YMOYL got their bonds, it still is pretty good. But what is really good to see, is that 30 year bonds are showing 4.53% interest rates right now. So hopefully by February, when the new bonds come out, the rates will be that much better.

uji
1-14-12, 1:48pm
IMHO: Personal Finance has gotten really very, very simple: First, protect your principal; second, lend, don't "invest" -- i.e., CDs, not stocks/bonds. Anything else is a gamble and, as allways, the odds favor the house. And we ain't the house, that's for sure.

I don't think that there is any reason to expect interest rates to go up any time soon -- that is, the next couple of years, or so.

1. Yes, the Fed is printing money at an alarming rate, but the money is NOT going into the economy, but into the reserve funds of banks. They aren't lending it; despite all the new money there has been no significant increase in liquidity.

2. American consumer spending goes down steadily from age 46 to death. The boomers hit the average age of 46 a couple of years ago. There is no reason to think that consumer spending will be of any use getting us out of the slump -- at least until we Boomers leave the playing field.

3. Europe is only now dealing with the debt bubble that we "dealt with" in 2007. (Not that we actually dealt with it -- but we at least acknowledged the problem, which Europe is only now beginning to.) All American financial institutions have at least indirect holdings in these Euro-zone financial institutions. When -- not if -- Europe crashes -- and it will in the next year or so -- North American economies will be at least depressed (if not pulled down with them). What do you suppose will happen when China slumps? It's not just gonna keep growing forever: they live in the same world as the rest of us.

From this, I suspect that low rates/returns will be around for a number of years and that inflation (as we've known it in the past) will not be a problem.

So, finally, in partial answer to the first post in this thread: the thing to do is not "invest" anything: stay out of stocks and bonds. Ladder CDs at the highest rates you can get out to 5-7 years. You won't make much, but you will make something -- guaranteed -- and your principal will be protected. Stocks will continue to go up and go down; but I think there is more reason for them to continue down on average rather than up. There is probably still some money to be made in US long bonds: nobody thought they would go down to 3%, now a number of folks are predicting they will go down to 2% before this is all over. I'm too much of a chicken to chance that. I'd rather lock in the best rates I can (2-3%) in CDs for the next 5-7 years and then ride the rates up.)

If you are industrious and/or lucky, you can make money investing. But the odds are longer than they've ever been, IMHO.

chanterelle
1-14-12, 2:09pm
"Second, what is the interest rate on your school loans and your other debt? You can use a portion of your IRA to pay off your school loans and I would suggest that rather than looking to do some investing. Thing is, how much of the IRA is interest and how much is what you put in? You can only take out what you put into the IRA, not the interest, otherwise you will be hit with fees." pay off

This might be a good way to go with the student loan debt. Call them and ask what $$ ammount they would take for a cash pay off. You may be surprised how low a sum they will accept, especially since you have had trouble being current. This may cut a chunk off from your debt, future interest, plus have the added benefit of getting the problem student loan off of your credit report so you can start fixing your score.

lhamo
1-14-12, 8:29pm
I doubt they will go for a lower cash payout on the student loan debt. You can't discharge student loan debt, and they know that. There is absolutely no incentive for them to discharge any of it. Actually what they probably LOVE to have people do is to defer -- that way your interest keeps piling up and in the end they get lots more out of you.

I second the recommendation for ING. Even though they have been bought out (by Capital One), I have maintained an account there. Yes, the rates are much lower than they used to be, but still good in comparison to your .1%. Small amounts of cash are available immediately via their debit card. You can also write a check or send e-funds to anyone from the online interface. And larger transfers take at most 3 business days to go through. Good place to park an emergency fund, if you ask me -- that's where ours is.

You might check about moving your IRA to someplace with a good array of investment choices and low fees. Personally I use Vanguard, and have been happy with them. The fees on their target retirement funds are higher than for their normal funds, but I find that is a good way to have a broadly diversified portfolio without a lot of fussing on my end. I have my old IRA from work there. It has bounced around pretty wildly the past couple of years since I transferred it, along with the volitile market, but at last check (yesterday) I think it was up about 9-10%. since August 2009 when I moved it. That's with no additional contributions other than reinvested earnings. I have it in the 2025 target retirement fund, which might be an appropriate choice for you (I think we're about the same age) -- though you might want to go for 2030 or 2035 if you plan to work longer or want a bit more in the stock portion.

Of course, I'm not a financial professional so all of this is my opinion only. YMMV.

Good luck making your choices and let us know what you decide. I'm always interested to hear how things turn out for people who ask for advice on this forum.

lhamo

PS: Waving a frantic hello to KIB and Jonathan -- we've missed you guys on the boards!

chanterelle
1-14-12, 9:14pm
"I doubt they will go for a lower cash payout on the student loan debt. You can't discharge student loan debt, and they know that. There is absolutely no incentive for them to discharge any of it. Actually what they probably LOVE to have people 'do is to defer -- that way your interest keeps piling up and in the end they get lots more out of you."

Ihamo, I mentioned this because I know 3 people who have managed cash settlements, all were in constant defferal because of finances.. One person was offered the settlement by the lender when she called to defer yet again.
While students loans cannot be discharged and interest can pile up until eternity, some lenders in this economic climate are willing to settle for cash now rather than great piles of future paper caclulations. It won't hurt to try.

Zoe Girl
1-14-12, 9:24pm
thanks all, I really hadn't checked back in awhile.

So student loans, I work in public service. I need 2 years of tax returns (as soon as I do 2011 I will use those 2 years) and then my payments are greatly reduced based on income and family size. I think the last payment I estimated was something like $40 on $40,000. So I stay in public service and pay for 10 years and the balance is wiped clean for my service to my community. That is a pretty good deal. My only other debt is some on a credit card that I am not worried about, getting some movement on the earning side of things. I have something lined up to add a bunch of money to my earnings with an 8 week summer job.

So i made one decision and moved the 401K from my former part time job to laddered CD's with Ally bank. That was the best rate with a bank with good ratings itself. The rest will come after I handle some more of the piles of paper I have left. So I will keep yo updated, and keep it simple

RosieTR
1-15-12, 1:33am
Yeah, nothing looks great in terms of interest rates but you can do better than 0.1%. Sounds like the student loan thing is worth hanging out with at the current time, especially since you need a big e-fund since you're a single parent. Additionally, it's usually a bad plan to pull out retirement accounts even if it's the principal and you don't pay fees because you lose that potential money in retirement. Since you're a public worker you might have a pension but if it were me I would sleep better knowing I had a few different pots of money for retirement than just the one (or two, if you count Social Security).

As for interest rates for an e-fund I would say to check out different banks, CDs or US bonds. I don't know about the 30 year...I believe they stopped issuing them awhile back so all are only available on the secondary market. The way that works is, if you want to buy a $10,000 bond that's earning 5%, usually the interest and length of time still on the bond is taken into account so you might wind up paying $12,500 for a relatively new one. The yield will wind up being what you could get by buying a 10 year now (not necessarily exactly but often pretty close) so I don't know as it would really save you tons unless interest rates drop lower. Whether they do that or not...well, if you know that for sure you could make a lot more money than by buying Treasuries! Selling 30 year bonds is also a bit less liquid than a CD or especially a savings account. At some point interest rates will turn around though, so have heart. I would tend to disagree with the "pull all your money out of the stock market!!!" type of thought for your IRA. If your IRA is balanced among some different classes (ideally stocks, bonds, real estate and international, read up on potential proportions for your age and risk tolerance) I wouldn't mess around with it unless it's either actively managed or with a company that charges high fees. It wasn't clear to me whether the earnings were dividends from stocks, interest from bonds, increase in price and/or shares, or some combination. If you don't have a pension plan as well as the IRA, you definitely don't want to pull any money out of it and you do want to make sure it's balanced for your situation. Many of the companies that manage these have excellent tools on their websites; they may also have in-person, phone or web chat help for free.

uji
1-17-12, 1:48pm
You can buy the 30-year Treasury easily at TreasuryDirect with no fee. You have to transfer the bond to a broker to sell it, though. Pissed me off when TD made that change...:(

rose
1-17-12, 4:06pm
For CD's i take the 7 year rate and accept that I may withdraw early and lose six months interest.

ljevtich
1-17-12, 4:47pm
Our e-fund is in ING, where we're earning 1%, which isn't much, but is 10 times more than .10%. We can access it within 3 days, which is readily accessible enough. We could always use a credit card to hold us over for that three days, if we had an emergency auto repair or something.

Just so everyone knows, the interest rate at ING has gone down to .85%, sigh, that was the highest around for a long time.


...

As for interest rates for an e-fund I would say to check out different banks, CDs or US bonds. I don't know about the 30 year...I believe they stopped issuing them awhile back so all are only available on the secondary market.

Actually that is not true. They have been re-issuing the bonds since at least Bush II time period. How do you think they paid for all of the QEs? through bonds!



The way that works is, if you want to buy a $10,000 bond that's earning 5%, usually the interest and length of time still on the bond is taken into account so you might wind up paying $12,500 for a relatively new one. The yield will wind up being what you could get by buying a 10 year now (not necessarily exactly but often pretty close) so I don't know as it would really save you tons unless interest rates drop lower. Whether they do that or not...well, if you know that for sure you could make a lot more money than by buying Treasuries! Selling 30 year bonds is also a bit less liquid than a CD or especially a savings account.

Sort of not. If people decided to buy a 30 year bond NOW through TreasuryDirect.gov the interest rates are at major lows, around 3.125% - very sad state for 30 year. I would strongly suggest against getting a 30 year, unless you can figure your rate of inflation is lower than 3%. If you put 10,000 into a treasury bond at that rate, for the year you would earn $312.50 for the year. It is still better than what is going on now and for the foreseeable future, but and the big but is, when the interest rates do come around, you are now stuck with a bond earning only 3.125%.

Even if you bought it through Treasury Direct, you can still sell it, but you have to go to someplace like Zions Direct to do so. And it will be a tougher sale because if the interest rates go up, your bond is not worth as much, so people will not spend more to get less.

And this is where it gets confusing for most folks.

A $10,000 bond usually does not cost exactly $10,000

Only last week, the 30 year bond cost 10,274.68 :0! So that is money that you have to pay to buy a bond!

It will take you a year just to get that money back, every six months you get a payout of half of $312.50, so $156.25 is your first interest payment. But it does not cover the cost yet. You have to wait until the second payment to just come even, with a $37.82 return for the year. Still better than most banks.

So every year, you are getting $312.50 back. You decide to reinvest it yourself, maybe in another bond or money for the house or whatever. You do not have to pay federal taxes on the money you earn, but you do have to pay state taxes.

You decide in 5 years that you want to sell the bond. The interest rates are now at 5%. But because your bond is not giving as much interest, you have to again sell it at a loss. Maybe you go to Zions Direct to sell it. There is a commission of 10.95 right off the bat. Then your $10,000 bond (that you paid 10,274.68!!) is only going for $9,500. So you again lose on the deal.

Of course, if you had kept it for the full term, you would have earned $9,100.32 and gotten the original $10,000 back. If you had put the earnings into savings, small CDs or MM that you did not touch, you would earn more.

uji
1-19-12, 2:23pm
... so you again lose on the deal. Of course, if you had kept it for the full term, you would have earned $9,100.32 and gotten the original $10,000 back. If you had put the earnings into savings, small CDs or MM that you did not touch, you would earn more.

All true -- as far as it goes. If you are buying 30-year bonds to hold, then you can do better with CDs -- at least in the short run. (The assumption that you will allways do better on CDs is false; CD rates are higher now, but there is nothing that guarantees that they won't go lower in the future. Your long-bond rate is guaranteed -- for better or worse -- for 30 years. Unless of course the bonds get called, which the Treasury does on occasion.)

There are other ways to make money on the long bond, though. If you think long bond rates are going lower, you can buy now, then sell at the lower rate -- getting back a return on your principal as well as the interest that you've made in the mean time. Remember, they said the long bond would never hit 3%; it has and has stayed there. There is some informed speculation, now, that it might go as low as 2%. If you believe that, you could gamble and buy now. But it's a gamble...

I made a good bit (for me) betting that Treasuries would go to 3%, buying higher and selling as they declined; but that was about all the excitement I could stand. So I'm outta Treasuries till rates get better...

PS Joe talks about this other way of using the long-bond in YMOYL, I believe. It wasn't just all buy and hold them. Also, remember that Treasury dividends are exempt from state tax, which can mean a good bit if you've an income tax in your state.