intro: While homeowners who can refinance their homes may rejoice at Freddie Mac's report yesterday that the 30-year fixed-rate mortgage averaged just 3.95 percent for the week ending Feb. 23, there is little good news for savers.
Most savings accounts are offering interest rates of less than one percent. Those wishing to save may need to work harder to find the right places to park their money.
Philip Cioppa, managing principal and chief investment officer of Arbol Financial Strategies, said the conventional rule for personal finance is to have savings to cover at least six months of expenses, and that money should be available when you need it, or liquid. So even though savings accounts provide little yield now, Cioppa does not recommend you remove all your money from your account. Emergencies happen.
Here are some tips to help you get the most out of your cash:
quicklist: title: Shop around. text:
Odysseas Papadimitriou, CEO of credit card comparison site CardHub.com, said people who comparison shop for a better savings account can sometimes find a much better interest rate.
While he doesn't recommend people invest in anything that makes them uncomfortable, they should at least inspect their options.
Sites like Google Advisor provide comparisons on traditional certificate of deposits (CDs), checking and savings accounts.
Whether it comes to a CD or dividend paying stock, Papadimitriou and Cioppa both recommend the investment adage: diversify.
"The key is to diversify and do your research," Papadimitriou said, adding that one option that is diversified by nature is a mutual fund.
quicklist: title: Certificate of Deposits, or CDs text:
Cioppa also recommends that you ask a licensed financial advisor about a brokered CD, which can be traded. Like many of the items in this list, they come with risks. Brokered CDs have specific "call dates," meaning the issuing bank may choose to terminate – or "call" – the CD after only one year or some other fixed period of time. Only the issuing bank may call a CD, not the investor, the SEC notes in its advisory for high-yield CDs. A bank could call its high-yield CDs if interest rates fall. But if you've invested in a long-term CD and interest rates rise, you'll be locked in at the lower rate.
As of Thursday, Google Advisor listed Colorado Federal Savings Bank as having the CD highest interest rate, or annual percentage yield (APY), at 1.05 percent for a one-year term. With the minimum of $5,000 to acquire a CD, you would earn interest of $53. Like other CDs, it has a fee for early withdrawal. This one charges three months of interest if withdrawn early.
That CD offers a similar return to Google Advisor's savings account with the highest interest rate as of Thursday: Incredible Bank's money market account. Incredible Bank also had an APY of 1.05 percent, but with a $2,500 minimum to open and a $10 monthly fee, which is waived with an average collected balance of $2,500.
quicklist: title: Fixed or variable annuity text:
Annuities are contracts with an insurance company designed to meet retirement and other long-range goals, according to the SEC. In return, the insurer agrees to make periodic payments to you beginning immediately or at some future date.
Cioppa said variable annuity rates have fallen along with other interest rates, but he has seen some at four or five percent. But if the market is doing is well, a variable annuity will grow. Variable annuities usually have a guarantee for a return on your premium, he said, so if the market tanks, you could still get your initial principal back.
Ted Schwartz, president and chief investment officer of Capstone Investment Financial Group and personal finance columnist for ABC News, said that if you have a long time horizon, an annuity may be worth looking into, especially those that allow withdrawals.
quicklist: title: Structured products text:
Cioppa suggests savers consider structured products, which are types of derivative investments linked to financial markets. These include corporate or public bonds and can have either a short-term or long-term investing horizon. They can have a yield of 5 percent or more at times, provided you hold them for a few years.
Schwartz said some of these structured products are FDIC-insured CDs.
"I would strongly recommend using those and having the insurance," he said.
Most CDs are insured for up to $250,000 by the FDIC.
quicklist: title:Treasury inflation protected securities text:
Treasury Inflation Protected Securities, or TIPS, increase in value with inflation and decrease with deflation as they are measured against the consumer price index, or CPI.
"So no matter what happens, when TIPS mature you're paid an original or adjusted principal, whatever's higher," Cioppa said, adding that they are short-term investments. "If deflation is really bad, you may at least get your money back."
Schwartz warned that TIPS are a "rather pricey asset class right now," and said for those willing to take on some risk, municipal bonds offer "great tax-free returns at this point."
quicklist: title: Precious metals text:
While Cioppa said investing in precious metals can be risky, especially gold, he has seen some consistent returns in silver.
"I don't recommend gold because of the fluctuating price," he said. "But there are reputable metals traders who can get you blocks of silver that can be turned into cash."
Schwartz said he still believes in the metals asset class, but he said it is risky and does not produce much in income.
quicklist: title: Cash value life insurance text:
This kind of life insurance is designed to help pay for the death benefit protection in an insured person's later years by keeping the premiums steady over the life of the policy.
Cioppa said this is an investment worth looking into if you are healthy and the cost of insurance is low, as opposed to those who have health problems that could lead to higher costs.
Though this is a long-term investment, cash value life insurance has a number of tax advantages, such as paying no current income tax on its interest for some products. You often do not pay income tax if you borrow cash value from the policy, according to New York Life insurance company.
Schwartz said cash value life insurance is a long-term idea that might be worth considering along with dividend paying stocks.