Where did my interest go?

Interest

It’s painfully obvious to more and more Americans that the interest from their bank accounts, money market funds, and other fixed income investments has plummeted in recent years.

Why the huge drop? Simply put, because the U.S. Treasury, the bedrock upon which most interest-paying and fixed-income investments are based, has purposely dropped rates paid on the securities they sell to banks, insurance companies, money market funds, and individuals to all-time lows in order to stimulate the economy in various ways.

Inflation Can Actually Turn Returns Negative 

Meanwhile, inflation, while lower than before, marches on. The Consumer Price Index rose by 1.5% in 2013, but as many people know, that doesn’t seem to reflect their ever-shrinking pocketbooks. Housing, tuition, healthcare, gas, insurance, tickets, dining out – all seem to be rising much faster than 1% annually! The key point is that basic savings and fixed income account rates are now lower than inflation so that in terms of actual buying power your true savings “interest” may actually be negative. In short, your money buys less and less each year.

So, caught in this squeeze between record low rates and continued inflation, what‘s an investor to do? The simple answer is you have to work harder – be more creative – in searching for higher yields that do, in fact, exist. Or retain a financial advisor to help you.

Creative Income Alternatives to the Rescue

Fortunately, there is a wide variety of higher-yielding, socially responsible alternative income investments available today. And while they are not FDIC insured like bank accounts, many are designed to protect your principal, and all of them have been used for decades by conservative savers, including individuals, retirees and institutions

  • Bonds.  Government and corporate bonds have been the foundation of fixed income investing for centuries. A bond is simply a debt instrument that pays the buyer a stated interest rate until maturity, when the principal is repaid. When you think about it, that’s not much different than a CD, except bonds are not FDIC insured. But many U.S. government bonds are similarly backed by various U.S. government agencies, yet can pay more interest. Municipal bonds are backed by a variety of state agencies and typically pay interest tax-free. You can also easily find bonds issued by major U.S. corporations, as well as foreign governments and companies. Most bonds are rated for credit-worthiness by various services, including Standard & Poor’s. They come in a variety of maturity lengths, and are available both individually or through bond mutual funds or exchange-traded funds (ETFs) . There are many factors to consider in choosing bonds including duration, yield, credit quality, taxability, current pricing, and of course, socially responsibility, that you can research on the Web or an SR Financial Advisor can go over with you in detail.
  • Community Investment Notes.  Community Investment Notes are another kind of debt/fixed-income instrument worth considering due to their higher-than-bank-yields today. These are issued by various Community Loan Organizations, such as Enterprise Community Loan Fund and the Calvert Foundation, that allow investors to earn a competitive interest rate while providing funds to help fund affordable housing, community health centers, food co-ops, schools and other facilities for low-income neighborhoods and cities. These truly high-impact investments provide investors with a very rewarding sense that their money is working to help people that need it most. The notes come in various maturities and terms.
  • Dividend stocks, funds and ETFs.  One of the most well-known alternative income investments is dividend-paying stocks. These are typically large-company stocks that pay monthly, quarterly or annual dividends you can take as cash or reinvest in additional shares. While such stocks are affected by the rise and fall of the general markets, they tend to be less volatile than non-dividend-paying stocks for the simple reason that investors may be less willing to sell shares when they are receiving regular income. Another plus is that stock dividends are typically taxed at the lower dividend rate of 15% or lower (depending on your income), versus higher income tax rates. Besides individual dividend-paying stocks, today there is also a large variety of mutual funds and exchange traded funds, including socially responsible investment (SRI) choices, that pay dividends while at the same time providing broad diversification.
  • Preferred stocks.  Many people are unfamiliar with this special kind of high-paying security that has characteristics of both bonds and stocks. Like bonds they are issued at a “par value”, in this case typically $25 a share, but they have no fixed maturity date. Yet like stocks, they pay dividends, not interest. Most importantly, while they tend not to rise or fall as much as common stocks, they usually pay higher dividend rates, perfect for many income investors. Long the favorites of institutions and wealthy investors, high-yielding preferred stocks in actuality are available to most anyone.
  • Fixed and Fixed Index Annuities. Another traditional favorite of income investors is fixed annuities, including fixed index annuities. These are essentially savings products issued by insurance companies (non-FDIC insured), that pay an annual interest rate that is either fixed or variable. Regular fixed annuities have historically paid higher rates than CDs, but their new offspring, fixed-index annuities that link their returns to various stock market indices, can offer even higher rewards. The key is that both fixed and fixed-index annuities guarantee your principal will never go down, protecting you from market losses. Annuities also grow on a tax-deferred basis, like Traditional IRAs.

It’s Easy to Branch Out

Because no one expects to see savings rates return to 5% anytime soon, learning to pump up your investment yield today is as important as knowing how to cut household expenses. Fortunately you have many alternative income sources to help you, including socially responsible investment brokerages, Portfolio Managers, and insurance companies. Ask them to prepare an alternative income proposal for you, and get your interest back.

As with all investments, there are risks and an investor can lose a part or all of their money.

Article provided by Progressive Asset Management Inc. For more information contact Celia Mueller, CFP®. Celia Mueller is a Financial Advisor Representative based in the Portland, Oregon metro area with Progressive Asset Management Group, the socially responsible investment division of Financial West Group (FWG, Member FINRA/SIPC. She can be reached at 503-656-1644 or cmueller@fwg.com. or www.celiamueller.com. Office of Supervisory jurisdiction: 1814 Franklin Street # 503, Oakland, CA 94612. 800471-7244.

Comments

  1. I have found the perfect solution to offsetting these low interest rates. By putting tight reins on spending I have found that I have more money each month to move into savings. My biggest savings has been quitting smoking, but I have also found that making my own lunch to bring to work each day along with coffee rather than going out to eat has been working out pretty well.

    Another tool use is avoiding paying interest. I also pay extra each month to pay off my mortgage that by the way I had the opportunity to refinance down from 30 years to 15 years at 3.1 % due to the low interest rates.

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