Econ + Personal Finance--The Post:"Basis Points + Multiply and Conquer"
"Basis Points":
washingtonpost.com
"Multiply and Conquer":
washingtonpost.com
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Edited for ease of reading.
>>>BASIS POINTS
By John M. Berry
Sunday , October 22, 2000 ; Page H02
Federal Reserve Chairman Alan Greenspan said it all in a speech Thursday: High oil prices do not appear to be affecting inflation expectations and have not noticeably damaged consumer spending.
He gave every indication of being pretty comfortable with the current stance of monetary policy.
A colleague, Fed governor Laurence H. Meyer, said in a speech that he remains concerned about the inflationary implications of tight labor markets but that pressure from wages on inflation could well be offset next year by a decline in oil prices.
In other words, the Fed has time to deal with any wage pressure that develops.
Meanwhile, bond prices rose over the course of the week, partly as a result of those comments.
Tomorrow, Treasury will sell $11 billion in three-month bills and $10 billion in six-month bills, followed Wednesday by $10 billion in two-year notes.
In when-issued trading Friday, the bills yielded 6.31 percent and 6.28 percent, respectively, and the notes 5.80 percent.
© 2000 The Washington Post <<<
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>>>Multiply and Conquer
By Albert B. Crenshaw
Sunday , October 22, 2000 ; Page H02
Millions of Americans continue to keep substantial sums of cash in low-yielding savings and bank money-market accounts, forfeiting, in the aggregate, between $30 billion and $50 billion in interest earnings every year, according to a new study by the Consumer Federation of America.
The contents of these low-interest accounts top $1 trillion, the CFA found after analyzing data from the Federal Reserve, and this money earns an average of 2.1 percent a year.
Most of the accounts are relatively modest--the median value of savings accounts is $2,000, according to the CFA--but a small minority of these savers have accounts with balances of more than $25,000. Among this group, the median value of their accounts, savings and money market combined, tops $46,000, and the average is more than $76,000.
These folks are thus losing real money.
This phenomenon is quite beneficial to banks, who find themselves with a supply of stable, low-cost funds to lend, but CFA officials and other consumer advocates are concerned that families and senior citizens are depriving themselves of income they could use.
Also, they fear that the low rates, combined with a lack of awareness that there are better-paying alternatives, could work as a disincentive to saving among a population that generally needs to save more.
So, what's going on here?
Two things, according to CFA Executive Director Stephen Brobeck.
First, "moderate-income Americans are obsessed with safety--they don't want to lose that money" and thus insist on keeping their savings in a government-insured account. This is especially true of older people, the study found, though surprising numbers of middle-aged and even younger savers turned up in the high-balance category.
Second, many savers don't realize that they can get higher rates and government backing by shifting institutions, or even changing account types within the same institution.
"Most people 55 and older believe there is little difference in interest rates paid on [certificates of deposit] when it can be as much as three percent[age points] higher," said Katie Smith Sloan, director of life resources at AARP.
Other factors that keep people in savings accounts are convenience and liquidity. Many savers say they want to be able to get their money quickly if they need it.
Most planners recommend that people keep amounts equal to three to six months of living expenses in relatively liquid form, and that may account for some of the balances the CFA found, but even these folks could be doing better with fairly minor changes in their accounts.
The losses to savers from low interest rates are substantial in a year, but because of the effect of compounding, over time they become truly astonishing. At 2.1 percent interest, the $1 trillion in these accounts would increase to $2.3 trillion in 40 years, but at 7.1 percent interest, it would climb to $15.5 trillion in that time, according to Providian Financial Corp., which worked with the CFA on the study.
In fact, for a quick look at the impact of compounding, there's a rough rule of thumb that the interest rate divided into 72 gives the number of years money takes to double. Thus, at 6 percent, it doubles in 12 years; at 9 percent, it doubles in eight years.
At 2.1 percent, money doubles in a little more than 34 years.
Try taking $1,000 and seeing how long it takes to double and redouble and redouble at various interest rates. Then compare those results with how long you figure to live. Interest rates make a real difference.
How can savers do better?
There are a number of ways.
If security is paramount, then government backing is key. But many savers don't have to give that up to do reasonably well--certainly a lot better than 2.1 percent.
First, there are various government securities that are backed by the full faith and credit of the United States.
The Treasury Department has started selling its own debt securities in smaller denominations over the years. These are quite liquid--they can be sold quickly and easily if you need the money--and interest is exempt from state and local taxes.
U.S. Savings Bonds are another excellent vehicle--especially, Brobeck said, the Series I inflation-protected bond. Series I bonds are currently paying 7.49 percent, are safe and can be cashed in easily. After six months, you can get your investment plus some interest. Note, though, that these bonds are meant as long-term investments, so if you cash in within five years of purchase you lose three months' worth of interest.
Savings Bond interest is also exempt from state and local taxes and isn't taxable at the federal level until you cash the bond; both characteristics can be big advantages.
For information on Treasury securities, including bonds, or to buy them, you can go to http://www.publicdebt.treas.gov. There are also calculators and other helpful tools at that Web site to help you figure out what's best for you.
Staying with your bank is another option. Ask about rates on certificates of deposit. These are almost always higher than regular savings accounts. You promise to leave your money in the CD for a while, but you can get it if you need it, minus some of the interest as an early withdrawal penalty.
If you think you might have to cash in early, get details on early-withdrawal penalties. The CD interest rate may be enough higher that after six months or a year, you would still be better off even if you had to make an early withdrawal.
Another alternative to preserving access is to buy a series of CDs with "laddered" maturities. This way, you'll have some of your CDs maturing at different times, giving you a series of points at which you can take the money if you need it. If you don't, you roll it over into a new CD.
Also, ask your bank about higher-rate accounts. Some banks, for example, pay higher rates if you agree to have automatic deposits made. These can be transfers from checking or some other automatic payment.
There are also deals in which banks "sweep" excess amounts from your checking account into savings so little of your money sits idle. And you can do some of this yourself, either on the Internet or via telephone transfers, which many banks offer.
"It's just cash management," said Providian Chairman Shailesh Mehta.
And you can shop. Try other banks, of course. Credit unions, if you're eligible to join one, often offer higher rates and lower fees. Small independent banks are often competitive as well, and folks at these institutions are more likely to get to know you and work with you.
© 2000 The Washington Post<<< |
