A Wealth of Knowledge - Spring 2013 - Got Cash? How to Get a Higher Yield…Maybe
Got cash? Did you get out of the market after the crash in 2009? Are you too leery to get back into the market, or do you feel it’s too late to catch the record highs? Or do you simply have cash sitting for whatever reason that does not seem to be earning much, if anything? It could be quite depressing to open your statement every month to find your cash earning nothing or an even more insulting 0.01%. If you have sufficient funds at one bank, you may hit the next tier to earn a higher rate. If that’s not the case, there are still channels for you to safely earn more on your cash, but it will require a little effort.
To earn a higher rate, look around a bit. Local or regional banks and credit unions may be more competitive and offer higher interest rates than large banks. You can simply look at their store front or in your local newspapers. If they have a promotion rate, they certainly will not hide it from you. Local or regional banks are smaller in operations than large banks, but they are still covered by the Federal Deposit Insurance Corporation (FDIC) and protect your money, as outlined below. Credit unions are not banks; however, the funds they hold are still federally insured under the National Credit Union Administration, as described below.
Another place to look is the internet. Online banking is offered by either banks that operate strictly online or banks of any size that simply add online banking to the services they offer. Online banking is really for do-it-yourselfers. Most of the operating of the account is done online or on the phone; service is truly no-frills. Since the customer is doing all the work and does not use much of the bank’s resources, the bank is able to use their savings on expenses and offer a better rate.
Certificates of Deposit (CDs) can be issued by credit unions or banks. Look for CDs insured by the FDIC or National Credit Union Share Insurance Fund (NCUSIF). CDs typically offer higher yields than deposit accounts or money markets in return for locking up your money for a stated period of time. You need to be cautious of not buying a CD with too long of a maturity period, as there is a potential opportunity cost if interest rates rise above the rate of your CD before maturity date. Breaking a CD before maturity may cause an interest penalty of associated fees.
The FDIC is backed by the full faith and credit of the United States government. FDIC insurance is limited to $250,000 per depositor within each ownership category per insured institution. If you have two FDIC-insured accounts titled in the same ownership category, at the same institution, they are insured for an aggregated maximum of $250,000. However, if these same two FDIC-insured accounts are held at different institutions, each account is insured up to a maximum of $250,000. Joint FDIC-insured accounts owned by two or more persons are insured up to a maximum of $250,000 per co-owner.
FDIC defines ownership category of an account by its registration type. There are eight basic types of ownership account categories: single, joint, certain retirement, revocable trusts, irrevocable trusts, employee benefit plans, corporation/partnership/unincorporated associations, and government accounts. FDIC insurance covers an insured bank’s deposits, including money market deposit accounts. Money market funds are not FDIC-insured since they are mutual funds, not deposit accounts.
NATIONAL CREDIT UNION SHARE INSURANCE FUND (NCUSIF)
The NCUSIF is administered by the National Credit Union Administration, which is a federal government agency. NCUSIF is the equivalent of FDIC insurance applied to credit unions. NCUSIF insurance coverage is also $250,000 per depositor within each ownership category per insured credit union.
An individual can open an electronic account on the www.TreasuryDirect.Gov website. The website is part of the Bureau of the Public Debt under the United States Department of Treasury. This gives the public direct retail access to purchase treasury securities. Within treasury direct, one may want to consider purchasing T-Bills or I Savings Bonds as an alternative to a cash deposit account.
T-Bills are usually issued (purchased) at a discount to their par value. Bills are sold in increments of $100 with maturity terms of 4, 13, 26, or 52 weeks. Interest is paid at maturity and is equal to the difference between the T-Bill’s par value and the issue price paid. Interest is federally taxable, but free of local and state tax. If you wish to sell your T-Bill before maturity, you would need to transfer your holdings out of TreasuryDirect to a financial institution that could facilitate the transaction.
I Series Savings Bonds are issued by the U.S. Treasury. I-Bonds accrue interest over the life of the bond and pay at maturity. The interest accrued is based on a combination of a fixed rate stated at issuance and an inflation rate. The inflation rate is adjusted twice a year based on the change in the Consumer Price Index for all Urban Consumers (CPI-U). Interest is federally taxable, but free of local and state tax. I-Bonds earn interest for up to 30 years. After the first 12-month lock-up period, they are redeemable at any point in time. If redeemed after 12 months but before 5 years, there is a penalty equivalent to 3 months worth of interest. After 5 years, there is no penalty. There is an annual purchase limit of $10,000 per account holder’s social security number. Interest accrued on I Series Savings Bonds issued after 1989 may be exempt from income tax if the bond holder pays qualified higher education expenses in the same year the bond is redeemed.
There are alternatives with potentially higher yields to holding cash in a deposit account or money market fund. Unfortunately, there is some work involved in finding those solutions for your cash. The potential yield will not keep up with inflation, but is still better than the zero–to-few basis points most money market funds and bank accounts currently yield. And with cash, you have little or low risk compared to stocks or bonds.
A Wealth of Knowledge - Spring 2013 Issue