Tuesday, March 30, 2010

Double Your Returns on Investments - Viewer Q & A

I had a very nice response from my ABC NEWS NOW show last week and wanted to share my favorite questions from viewers, along with some answers you might find helpful!

Q. Should I buy gold? If so, how do I buy it?
Thomas, Sante Fe, NM
Submitted via Facebook

Ellie: Today’s discussion has been about investments that double your returns, and we’re talking about small returns to begin with. Consequently, gold doesn’t qualify as a risk free way to double your returns. But you could keep gold in your portfolio for safety and protection as a hedge against inflation. As always, keep your portfolio diversified and don’t overstock on gold. If the dollar stays weak, as it is suppose to do until interest rates are rising again, then the price of gold is expected to rise in the second half of the year. You can buy gold in one of two ways: you can buy a gold based ETF (exchange traded fund), which is traded like stock. Or, you can buy gold coins such as the American Eagles. Go to money.org, to find a gold coin dealer. Store these coins in a safety deposit box at a bank.

Q. If a high interest bearing checking account has so many hoops that I have to jump through, then is it worth the effort it to park my extra $20,000 in that account?
Rosha, New York
Submitted via blog

Ellie: Yes, high interest bearing checking accounts can earn as much as 4.3% and they are complicated and require a certain number of debit transactions because they make their money from merchant fees from those transactions. They also can require direct deposits or automatic payments. But if you took your $20,000 and parked it there, instead of making nothing (which is what you would do in an average checking account, when adjusted for inflation), you could, instead, make $860 in interest.

Q. Do high interest checking accounts have the same protections that regular checking accounts have? I’m concerned because most of these are found in small banks and we all know how many banks have failed in the last couple of years—plus, they aren’t local to me and I’m a bit squeamish about banking long distance.
Victoria, Spokane, WA
Submitted via email

Ellie: Yes, most of the high interest checking accounts you’ll find at www.checkingfinder.com are held with small to medium sized banks because it’s a new stream of revenue that is working for these smaller financial institutions. Not all of these accounts are created equal, so you need to do your research before you sign up. Some of these have an automatic reimbursement of up to $25 monthly for ATM fees, because they understand there will be a charge for their customers who don’t bank with a mainstream banker. In terms of your money being secure, have no fear! They have the same FDIC protection offered by any local or big named bank, which among other benefits is up to $250,000 per person per bank.

Q. I’m interested in investing for double my return at less risk and was thinking about investing in bonds because some of my more savvy investing friends have found success with their bond investments. What, would you say, are the least risky bond mutual funds?
Jill from Chicago, IL
Submitted via online contact form

Ellie: Even though bond mutual funds are less risky than stock mutual funds there is still some risk involved, unlike non traditional CDs and high interest bearing checking accounts. Short term bonds tend to be less risky than intermediate and long-term bond funds. But understand that you can lose money as the bond market goes up and down. Do your homework by going to Morningstar.com to research how the bond mutual fund performs. Granted, it’s rare that you would lose money over the course of a year. In fact, the greatest kind of disappointment you might have, if anything, is that they just don’t make as much money as you hoped they would make. But that is a price worth paying for a 4% to 5% return on this kind of short term investment.

Q. If I want to concentrate on de-leveraging, should I pay off consumer debt before I build up an emergency fund? If the most I can get on a high interest checking account is a 4% then wouldn’t paying off a credit card that is at 16% make better financial sense?
Lee Green from Colorado Springs, CO
Submitted via Facebook

Ellie: On paper, it makes more sense to use that saved money to pay down a 16% rate than it would be to get a 4% (max) rate on the high interest checking account. However, there’s a hidden factor here and that is the uncertainty of what your economic future holds. With unemployment in double digits in many parts of the country and employers offering paycuts to keep employees gainfully employed, there are no guarantees. That’s why you need an ample emergency fund—around 9 months of living expenses if you are a dual income family and 12 months if you are a single paycheck income. I’d recommend you put a portion of your savings toward consumer debt and a portion toward building your emergency fund in order to build one up while you’re paying the other down.

Ellie Kay
America's Family Financial Expert (R)

Wednesday, March 24, 2010

Earn 4.3% on Your Checking Account? You Can Double the Returns on Short Term Investments

The return on your savings account, money market account or certificate of deposit is probably hovering at 1.7% (see below), but what if you could boost that return to 3.4% or more? You would double the returns on your short term investment!

In the spring of 2008, consumers were saving less than 1% of their income. But then the economy headed south and savings headed north to where Americans were saving over 6% a year later. In fact, as a nation, we saved 5.6 trillion dollars last year. But wait! That’s not all the good news—there’s more! Inflation is projected to remain relatively low for the next five years, hovering around 2.5%. This means that all those people who have been saving money have a legitimate question to ask—what should we do with our savings? If you put it in your basic checking account, you will lose money due to inflation, but how do you make it grow without risk? I was recently on ABC NEWS NOW to discuss this problem and here are some of the highlights:

Q. Ellie, many of the people who are putting away 6% of their income are saving for a time in the near future when they feel comfortable enough to spend again. What are some of the things that these savers should not do with their money?

Ellie: I think it’s just as important to know what not to do with your money as it is to know what to do with that savings. If you are like most of those savers, you’re saving for the short term—at least temporarily. So that means you should not tie up your investments in stocks. If in the next three to five years, you plan on starting a business, buying a home, sending a child to college or buying a car—you should look at short term investing and not long term. There is a difference between funding long term investments, such as retirement and saving cash that you might need in the next three to five years. Second, you should not put these short term investments into money market accounts or traditional CDs because the money sitting in these low yield accounts, when weighed against inflation are basically making you nothing. When you do the math, you’ll see that a basic account making around 1.7 % interest, after you pay taxes on the growth and then adjust for a 2.5% inflation rate, is losing you money. In fact, that $100 you now have will be worth $98.60 next year.

Q. Then where do we start and if you are advising savers to avoid putting their short term savings into a savings account, then where do they put it to protect the principle and make the money grow?

Ellie: High Interest Bearing Checking accounts are a good place to start. In the past, these kinds of checking accounts haven’t been worth the effort. But recently, some financial companies have responded to the economic situation and they have found a way to still make money by allowing you to earn money as well. These kinds of high interest bearing checking accounts can usually be found in small to medium sized banks and some of them are paying 4% interest, which is 30 times what you could make in an average checking account or money market account. You can go to http://www.checkingfinder.com/ to find one of these kinds of accounts. An example of this is Royal Banks of Missouri, that pays 4.3% on balances up to $24,999 and 1.4% on balances over that maximum. There is a catch, however, you must use your debit card at least 10 times during the statement cycle, make at least one direct deposit or an automatic payment per month and then receive your statements online. If you don’t meet ALL this criteria, the hit is a big one because you’ll only earn .15% on the entire balance for the month.

Q. So a High Interest Bearing Checking account is one way to double your return. If we’re not having much luck in average money market funds and traditional CDs, then is there another kind of CD out there that might help those who want to double their return?

Ellie: As a matter of fact, you can look at some of the nontraditional certificates of deposits to get a better rate. First, look for the introductory teaser rate which are found at bankrate.com or ratebrain.com. I found some for 4.3%. You’ve seen the teaser rates for credit cards and these are basically the same kind of offer—they have limitations and stipulations and if you want them to work for you, then you’d better know what those boundaries are. Most of these introductory CD rates are from banks who want to boost their deposits by offering a drop dead gorgeous interest rates. As long as they are FDIC insured, you don’t have to worry.

Q. In the past, it’s been wise to ladder your CDs, is that still true, even with the nontraditional certificate of deposit?

Ellie: Yes, the laddering concept is still the same. Basically, you’ll divide your CD money into four or five pots of money, then invest the portions into CDs that will come due over the next five years. That way, when interest rates rise (and they will) then you won’t have to wait five years to take advantage of the higher rate; you’ll be able to roll over the CD that matures next. This strategy also gives you more access to cash, should need it.

Q. One of the new nontraditional CDs that can give you twice the return at no risk is called a STEP-UP product. How does this work?

Ellie: This is a new kind of product that offers longer maturing CDs at a higher rate for each year that you hold the certificate. The first year, it may offer a 1% return, but in years two and three, you could see it rise to 2% and in the fourth and fifth years it would be 4%. They are FDIC insured and you will need to buy them through your brokerage firm. But the good news is that you do not pay the commission, the issuing bank will cover that amount. However, if you want out of the CD early, you could go back to your broker and they could try to find someone to buy them from you, but in that case you would be the one paying the broker’s commission.

Q. A second kind of non-traditional CD is called a “Structured” CD, how does it work and are they a better option than a traditional CD?

Ellie: The returns on a structured CD are tied to an index (such as the S&P 500) or they could be tied to currency movements or inflation. You are guaranteed not to lose money should the index decline, which is nice but if it goes up, you’ll only get to take advantage of a part of that gain. So if the S&P goes up 10%, you may only get 6%. While some of these are FDIC insured, others are insured by the bank. I recommend the FDIC insured variety.

Q. Most of those who saved a part of that 5.6 trillion dollars last year, are short term investors who are saving to buy a car, house, or pay for college. While some aspects of the bond market have been attractive in recent months, is there a short term bond investment that will still allow savers to double their returns with no risk?

Ellie: There is a group of short term bonds that invest in municipal and corporate bonds and these can earn up to 4% and 5% in returns! Like our nontraditional CDs, these are also purchased through a brokerage firm, but as with any kind of a mutual fund it is a good idea to check the fund’s rating at Morningstar.com. Not all of these funds are created equal and some are better than others. Of all of the returns we’ve talked about so far, this investment option is the riskiest. Sometimes the bond market performs well and sometimes it doesn't, that's the risk you are taking for the higher return in this case.

Ellie Kay
America's Family Financial Expert (R)

Tuesday, March 16, 2010

When Free Credit Reports Aren't Free

When A “Free” Credit Report is not Free

Ellie was on ABC News Now this past week talking about this critical topic. Since 2004, consumers have had the right to request a free credit report every 12 months from each of the three credit-reporting agencies. But almost from the beginning there’s been confusion about how to get a free credit report. There are thousands of people who respond to TV ads offering “free” credit reports or they order a credit report online only to later discover that they have signed up for a monthly credit-monitoring service that was definitely not free.

Q. Let’s start with the obvious question, Ellie, when is a free credit report really free?

Ellie: There’s basically one primary way to get a no-strings-attached free credit report and that is to go to AnnualCreditReport.com or call 1-877-322-8228. You can also write into Annual Credit Report Request Service at PO Box 105281, Atlanta, GA 30348-5281. While there are many look-a-likes sites, there is basically one government site and that is AnnualCreditReport.com .

Q. What is the difference between a credit report and a credit score and are they both free?

Ellie: A credit report is your credit history and that is free as outlined above. However, you are not entitled to a free credit score. The credit score is your FICO (Fair Isaac Credit Score) and it indicates your credit worthiness and will impact a variety of financial areas including what kind of Annual Percentage Rate you will pay for your mortgage loan.

Q. How often can you get a free credit report and from what credit reporting agencies?

You are allowed one free report, per year, from each of the three major reporting agencies: TransUnion, Experian and Equifax. You don’t have to get all of them at the same time. In fact, I recommend that you spread out each of the reports every four months. That way you can track, for free, whether there have been any major changes in your credit history on a regular basis.

Q. Should I order a copy of my kids’ credit report to see if someone stole their ID?

Ellie: Child identity theft is on the rise and it is important for you to order a copy of your child’s credit report at least once a year to make sure it has not been compromised. You should also go to Social Security Administration website and order a copy of your child’s social security earnings to make sure someone isn’t using their number in order to obtain work.

Ellie Kay

America's Family Financial Expert (R)