Are your savings suffering?
For years, if you wanted to grow your savings and at the same time keep your money secure, you invested in Certificates of Deposit (CD). What’s not to love? They provided a low-risk investment, generated a higher interest rate than a bank savings account and were protected by the Federal Deposit Insurance Corporation (FDIC). The only drawback was the possibility of an interest penalty if you withdrew funds before the maturity date.
But in today’s financial climate, CDs are not the performers they used to be. In fact, they are not even keeping pace with inflation. For example, in mid-2012, a 12-month CD was earning around
1 percent, but with annual inflation at nearly 3 percent, you are actually losing about 2 percent in purchasing power.
If your savings goal is longer term and you are looking for other low-risk alternatives, it might be time to review other options. Your financial professional can share the risks and potential returns, but here are some of the options that you should know about.
U.S. Government bonds—These bonds earn about the same interest as a CD, but the interest is not subject to state or local income taxes. Like a CD, you will have to pay a penalty if you redeem a bond before its maturity date. And you should be careful to wait until after interest is posted before you redeem. But they are backed by the full faith of the U. S. Government.
Municipal bonds—These bonds give cities, states and other local governments and agencies a way to raise money to pay for big public projects like highways and hospitals. Municipal bonds traditionally carry very low risk, as they are backed either by revenue from public utilities or tax income received by state and local governments. Plus, like U.S. Treasury Bonds, the interest you earn is tax exempt.
Dividend-paying stocks of large companies—Many investors have switched from bonds to dividend-paying stocks in an effort to increase their rate of return. Many large Fortune 500 corporations are paying higher-yield dividends because of their strong cash reserves. But the stock market has been nothing but unpredictable in recent years, so there are no guarantees that dividends will be stable either.
Fixed annuity—While not guaranteed by the FDIC, fixed annuities are backed by the strength and power of an insurance company. A fixed annuity pays a guaranteed interest rate and could be right for you, but you have to understand that this is a retirement investment, and penalties come with any withdrawals made before you reach 59½ years old. The insurance company makes the guarantee, so be sure you deal with one that has a strong reputation for fiscal responsibility. No taxes are paid on annuity income until you start taking withdrawals.
The bottom line is this: Know your options, but more importantly know the risks.
- Four Ways to Save Your Tax Refund Safely (fatwallet.com)
- Types of Investments (creditrepair.com)
- How Do Certificates of Deposit (CDs) Compare with Municipal Bonds & Jumbo CDs? (ally.com)
- Should I Choose CDs or Bonds? (ally.com)
- Investment strategies-to-grow-your-income (slideshare.net)