Competition For Your Money Finally Picks Up

Competition For Your Money Finally Picks Up

Rate information contained on this page may have changed. Please find latest savings rates.

Following the Fed's movement of the Fed Funds rate to 50 basis points last week, we are finally seeing competition for your hard earned cash. Here are a couple of neat offers that caught our eye.

Here are some neat offers that have just come to market that may indicate that the long period of low interest rates may be ending, and competition among banks for your money may be picking up.

Savings Bonus – Up to $200 from CIT Bank

CIT Bank is offering depositors up to a $200 bonus for funding a savings account with new money between now and the end of 2016.  You can learn more about this offer here.  BestCashCow finds this offer particularly attractive as discussed in this article, especially as CIT Bank always has outstanding customer reviews.

CD – 11-Month No Penalty CD from Ally Bank

Ally Bank is offering depositors an 11-Month No Penalty CD paying 1.25%.  The rate is not particularly compelling as we have seen 1-year CDs paying 1.25% and over for some time now (see the best one year CDs here).   What is attractive about this offer, however, is that the CD can be terminated without penalty at any point following six days of opening.  Quite simply, there is no reason not to move your cash on deposit in an Ally savings account to their 11-Month No Penalty CD, even if you think you might need to access the cash over the next 11 months.

Online 2-Year CD Rates Cross 1.50% and Credit Union 5-Year CD Rates Cross 2.50%

A handful of online banks have begun to offer 2-Year CD rates over 1.50% (see the banks and rates here).    More than a handful of federal credit unions are now offering CD Rates over 2.50% (the credit unions which you can access may vary according to where you live, see the 5-year credit union rates where you live here).   BestCashCow does not currently recommend locking into CDs that are longer than 1-year in duration as we anticipate dramatically higher rates in 2017.   It is nonetheless very encouraging to see banks begin to offer compensation for time deposits that have been better than anything we have recorded in over a year.


How to Create A Budget

How to Create A Budget

Rate information contained on this page may have changed. Please find latest savings rates.

Do you know how much money is coming in and going out of your paycheck each month? The best way to gather this information is by creating a budget. This will let you know where you spend your money. You’ll also discover where you can cut back on your expenses, which can help you save money. This article explains how to create a budget and make that budget work for your needs.

Write Down Your Goals

The first thing you need to do is write down your goals. These are goals that you have for your personal finances, which might include paying off your credit cards, becoming free from debt, and starting up a savings account. This is the first step since is helps you track your progress.

CHECK THE BEST ONLINE SAVINGS RATES

Record Your Purchases

When you record your purchases, you need to record everything, even those little purchases, which you barely think about. While you may not think they’re a big deal, these little purchases can become an issue then you add them up.  A group of little purchases can equal the same amount of money as a big purchase.

When you have too many little purchases, you will find your money disappearing faster than you can track it. So, whenever you go out, at least for the first few weeks, you should record every purchase you make and this will help you see where your money is going.

Create Spending Categories

In order to determine where your money is going, you need to do a little organizing. Some basic categories listed in budgets include utilities, food, debts, work-related expenses and fixed expenses.

You can include categories for things that are important to you. This includes things like car insurance, birthdays, life insurance, and savings. Keep one category open for fun money that can be used for special occasions and just having fun.

Hold a Meeting About Finances

If you have a spouse or other household members, you will need to hold a meeting with them to discuss the budget. Talk it over. You can come up with a plan for your budget, compromising and negotiating until you find something that works for both of you.

When you work with your spouse, you’re more likely to keep on the budget. Then you’ll both be on the same page. Each person needs to be willing to work together and give a little to get the best results.

Schedule Time to Make the Budget

Create a budget can take some patience and work. Make sure you have some free time to get the work done. This budget needs to be something you can live with long-term. Keep some wiggle room in your budget in case of an emergency.

Take the time to make a budget that allows you to live within your means. If you have to make too many sacrifices then you may find it difficult to live within your budget.

Tweak the Budget

The budget you create may not always remain the same. You are not going to be in the same financial situation next year or five years from now. That’s why you should periodically take a chance to look at a budget.

In order to see if there are things that you can change, look at what you need to meet your needs and which items can be eliminated. While you want to make changes to your budget, you don’t want to tweak your budget too often.


Interest Rate-Tied Structured Notes May be a Good Play on Rising Yields in 2017

Interest Rate-Tied Structured Notes May be a Good Play on Rising Yields in 2017

Rate information contained on this page may have changed. Please find latest savings rates.

I have written many articles on structured notes on this website over the past several years and fielded a lot of questions from readers of the site about these notes.  These types of investments are not FDIC insured and ordinarily require a brokerage account with an investment bank like Morgan Stanley or Merrill Lynch to access.  Hence, they are not for everyone.  In fact, even for the most aggressive depositors and investors, they should only make up a small part of your portfolio.   But, against the indisputable backdrop of rising yields and a steepening yield curve in 2017, it is a good time to take another look at these types of notes.

The interest rate-tied structured notes that are most prevalent are ordinarily tied to US Constant Maturity Swap Rates.  The prospectus underlying these notes will always identify Reuters Screen ISDAFIX1 Page as the governing measurement, but the rates can be estimated by looking at the Constant Maturity Swap (CMS) rates at the bottom of this Federal Reserve webpage; the 2-year, 5-year, 10-year or 30-year swap is the difference between those CMS rates and the 6-month rate.

Interest rate-tied structured notes come in many different forms.  For example, banks can issue notes that are tied to the 3-month CMS or LIBOR that have a cap and a floor (i.e., trade between, say, 3% and 10%).  Just a few years ago, they issued notes that paid a fixed rate as high as 8% so long as the 6-month LIBOR stayed between 0 and 6%.   However, since the long end is likely to rise much faster than the short end of the yield curve, investors and depositors should look predominantly at two categories in 2017: those that are based directly on the 10 year CMS swap rate and those that are based on a spread between a short swap rate (either 2-year or 5-year) and the 30-year CMS swap rate times a certain multiplier (usually 4x or 5x for the 2-year CMS-based notes, and as high as 8x or 9x on the 5-year CMS-based ones).   There is always a second condition that notes will not pay interest for those days where an equity indices (usually the S&P 500 or Russell 2000) falls below a barrier level.  The barrier level is ordinarily 75% of where the index is trading on the day the notes are priced.   These notes ordinarily have a capped maximum interest rate that they can pay (between 9 and 12%) and often guarantee payment of that interest rate for the first year.  These notes are usually very long term in duration and are sometimes callable after the first year.

In a rising interest rate environment, these notes are likely to produce strong interest as determined at each reset date.   For example, those notes that are geared to the 2-30 CMS spread could easily get to their maximum capped interest rate as the spread gets to (and assuming it stays above) around 2%.  An interest rate around 8% to 10% will probably be a nice interest rate to make over the next few years as rates rise, especially as those in bonds begin to lose money quickly.   (Likewise, however, if we were to see an inverted yield curve, even one with much higher yields across the board, these spread notes could, in fact, yield nothing).

In addition to the interest rate risk, these interest-rate structured investments are not without other real risks.   We define three main risks, although there are many more.

First, there is credit risk.  These notes are tied to the debt of the issuing banks and are not FDIC insured.  While Morgan Stanley, Chase or Citibank are pretty good credit risks, so too was Lehman Brothers as we entered 2008.   Natixis, BNP Paribas, Societe Generale, Deutsche Bank and Credit Suisse are also big issuers, and while their notes can now be acquired at a discount, you should not be a purchaser of these notes at the moment unless you recognize and understand the credit risk that you are assuming.

Second, you have liquidity risk.  These notes extend out for very long periods of time, and if you (or your estate) need to get out of them, you are going to get hosed.  You can often benefit, however, from the hosing of others by buying notes through your broker on the secondary market.   Under any circumstance, you should recognize that you are never likely to be liquid quickly, and even if the interest rate play that you want to make materializes and your notes are callable, you could still be holding the notes in some distant interest rate environment that you cannot really foresee at the moment.  

Third, you have a risk of phantom income in the form of Original Issue Discount (OID) that your broker will be required to report on your 1099 by virtue of your ownership of these notes.  OID is determined largely based on the discount that the issuer sells the notes to your broker and an amortization schedule in the prospectus, and may substantially reduce the effective income of these notes in the first few years after the notes’ original issuance.  In order to fully understand the effects of OID on your taxable income, you will need to read the prospectus carefully and speak with your tax advisor.

Therefore, while interest rate-tied structured notes can be an effective way to generate yield in both a rising rate environment and a steepening yield curve, they are very risky and aren’t for everyone.  Even the most aggressive investors should therefore keep a portfolio that is much more skewed towards cash accounts and very short term CDs.

Note: There has recently been a large issuance of interest-rate tied structured notes that involve a return of principal of less than 100% if a second defined barrier level is breeched on the date of maturity.  For the same reasons that we strongly recommend that depositors avoid all equity-linked, commodity-linked and commodity-linked structured notes, interest rate-linked notes that do not guarantee 100% of principal at maturity should be categorically avoided in all circumstances.

See the best savings rates here.

See the best CD rates here.