Tuesday, December 4, 2012
In this low interest environment every dollar counts. That is why I like applying for checking accounts simply for the bank bonuses, in order to generate some extra money off my investment capital. Interest rates on savings and checking accounts were much higher just prior to the financial crisis in 2007. Term deposit rates are down significantly as well. Unfortunately, with the Federal Reserve easing interest rates to almost nothing, investors are earning almost nothing in interest from savings and checking accounts. Retirees, who used to rely on CD Rates in the 4% - 5% range just a few short year ago, are seeing CD Rates decrease to very low amounts indeed. The low interest rates are barely sufficient to cover inflation. As a result, money is losing purchasing power due to current inflation. If inflation increases as a result of the money printing by the US Federal Reserve, then any investment in fixed income would produce negative real returns. In fact, the Federal Reserve has maintained a policy of keeping interest rates low at least until 2015. This means that interest rates on treasury bonds, and other fixed income instruments are probably going to go even lower, judging by the trend since 2008. Some savers find it best to actually obtain home loans at current low interest rates. Since term deposits are not yielding much, fixed rate home loans seem like a good investment idea.
Unfortunately, since many banks accepted TARP payments in 2008, they have reduced the number of bank bonus deals. As a result, it is getting particularly difficult to find decent bank bonus deals in the market. Luckily I have been able to scour the major banks, and find some deals as of recently. In addition, given the fact that many of these banks are becoming profitable again, they would likely increase the amount of bank bonus deals in the market. Hopefully, as the economy rebounds in the near future, interest rates will increase. This would mean that for retirees relying on fixed income, CD Rates are going to increase, and they would once again be able to live off the interest. Some of the interest rates that financial institutions like Discover offer on five year Certificates of Deposit are higher than even five year United States Treasury Bonds.
Until then however, retirees still need to be able to generate some amount of interest income. As a result, their best bet would be to focus on the companies offering the best interest rates in the marketplace. Focusing on interest rates above the national averages would be the safest bet. Of course, in order to maintain principal, retirees need to be mindful of the FDIC deposit insurance limits of $250,000 per bank.