CERTIFIED PUBLIC ACCOUNTANTS AND ADVISORS |
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WHERE TO FIND HIGHER-EARNING CASH ALTERNATIVES In uncertain times such as these, cash is king. Frightened
investors are fleeing to cash, and well-funded cash emergency funds can prove
invaluable for families worried about losing their jobs or facing other
emergencies. However, with the Fed pushing down interest rates, the after-tax
yields on standard cash equivalents such as money markets and savings accounts
are not much better than stuffing your money under the mattress. CERTIFIED FINANCIAL PLANNER™ professionals don’t
advocate stashing your cash in a mattress or coffee can—there are still those
pesky issues such as theft and fire—but they do suggest some ideas for getting
the most out of your cash. Shop around. Money market fund yields have plummeted
to nearly half their high of around six percent at the start of the year.
Average rates on bank savings accounts have fallen to just slightly over a
scrawny one percent, according to Bankrate.com—well below the annual inflation
rate. Rates for certificates of deposit (CDs) have dropped to their lowest
levels in seven years, making it especially tough on retirees who depend on
interest earnings from their CDs. Three-month CDs were earning only 2.5 percent in mid-October, and
one-year CDs were earning 3 percent. Yet better deals can be had, with some shopping around.
Some banks are offering higher yields to customers who keep larger balances (but
consult with your financial planner on this; it may not be financially wise to
keep too much in cash). Banks that market over the Internet frequently offer
higher savings rates—some over four percent. Ladder your CDs. One trick, which can be done with
bonds as well as CDs, is to ladder them. This means you buy CDs of varying
maturities—say from three months to five years, dividing your funds roughly
equally among them. When a CD matures, you roll it over into the longest-term CD
on your ladder, because longer-term CDs usually earn more than shorter-term
ones. After a while, the shorter-term CDs are replaced with longer-term
higher-rate CDs, yet you have CDs maturing every few months, making available
the cash you may need. Ultra-short bond funds. Some of these funds were
returning nearly five percent in September. Investing in these funds, unlike
investing in CDs or money markets, risks your principal, especially if interest
rates rise again. However, most investment experts consider the risk fairly
small because of the short maturities (less than a year) the funds invest in. Short-term bond funds. They’re returning better
than most ultra-short funds, though with a little more risk because the average
maturities are longer (around three years). It’s often best to stick to funds
investing in high-quality corporates or U.S. Treasuries (average total return
for government bond funds through the first nine months of 2001 was about seven
percent, according to Lipper Inc.). Inflation-adjusted bonds. Combining a fixed return
and an inflation adjustment, these U.S. Treasury bonds are yielding about six
percent. You can buy them directly or through mutual funds. REITs. Real estate investment trusts (REITs) are
higher up on the risk ladder, as are most real estate investments, but REITs
generally kick off healthy dividends because they must distribute 90 percent of
their net income to their investors. Average yields on the Morgan Stanley REIT
index this fall were around seven percent, and you can find yields significantly
higher than that. Unless you’re very familiar with REITs, you’ll want to
talk to your planner or investment expert. Pay off debts. Building easily accessible cash is
probably the best option for most families, especially for something like an
emergency fund where they might want to keep three to six months of bare-bones
living expenses. However, if you’re sitting on a load of high-interest debt,
it might be a better move to pay down some of it. Minimum debt is always good in
difficult times, and paying off an 18-percent interest credit card (whose
interest rates aren’t going down these days) provides a healthy return on your
money. Just be careful what debt you pay down. With a credit card, you can usually turn around and take a cash advance on the card if an emergency occurs. Accelerate payments on a car loan, that money is gone, short of selling your car. Prepay a home mortgage and you run the risk of not being able to obtain an equity loan later if you lose your job. November 2001— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by McGuire & Co., LLC, a local member in good standing of the FPA. |
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