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Looking for Lost Income?
In case you haven't noticed it, interest rates have been dropping rapidly. This has brought joy of those who want to refinance their mortgages, and to those who owe money and are in a position to change interest rates on the debt they carry.
In case you haven't noticed it, interest rates have been dropping rapidly. This has brought joy of those who want to refinance their mortgages, and to those who owe money and are in a position to change interest rates on the debt they carry. For business owners and others who are looking for money to build their businesses and other productive enterprises, this is very welcome news. So, who is not happy with these developments, and who is suffering?
Since September of 2007,money market rates have dropped from an average of 4.7 to 3.4%. It is conceivable that rates by the end of February could be as low as 3%. For those among us who live on fixed incomes that is a serious setback. While the Federal Reserve is trying to stave off inflation, i.e. increasing prices, the incomes of many are dropping. Another group on unhappy people is the savers among us. Despite published reports of the low savings rate in the United States, there are many people who are saving, particularly those close to retirement.
This is an environment that raises cautions. Savers and investors who are looking for yield will, in times like these, move to risky investments that appear to offer high yields with little risk. Accept the fact that higher yields mean higher risks.Some risk, such as that inherent in longer term interest rates are less serious than others. A purchaser of certificates of deposits or high quality bonds is not really taking a risk of the loss of principal, rather they are risking a loss of interest earnings as rates rise while they are trapped in a long term vehicle.
This is the type of risk that those who need income or want higher savings rates have to accept in this environment. One bit of good news is that rates on certificates of deposit and bonds have not fallen as fast as the federal reserve has lowered its interest rates. Now is the time to look hard at insured certificates of deposit for safe, increased yields. There are a number of good web sites that will make this type of shopping easier. For those with large balances to deposit, there are new forms of pooled certificates that provide FDIC insurance to balances well over $100,000 per account.
Short term bond funds are higher yielding, but a bit riskier than certificates of deposit. There are a number of funds that buy only highly rated bonds, so the risk of default is slight. Still, these funds will decline in value if interest rates start to climb again. But, for those who need this higher yield, this is the next best alternative to certificates of deposit. As always, caution must be used in selecting higher yield options. A yield that is too good to be true, probably is. We are happy to provide recommendations of both certificates of deposit and quality bond funds.
Start the year off right. Easy ways to stay in shape in the new year.