Posts on Jul 2016

Savings Certificates: How To Keep Your Money Spinning

A share savings certificate is much like the familiar certificate of deposit (CD) offered by banks. It acts like a traditional savings account in that you deposit money to collect dividends over time. It differs from a traditional savings account, though, because you cannot withdraw or deposit money at will.

Instead, you agree to place your money on deposit for a preset period of time, called the “term length,” during which you may not make withdrawals without a penalty. Because you trust your money with the credit union for a longer period of time, longer term CDs are likely to have much better rates than a savings account.

You can deposit your money for as few as several months or as long as several years, but the longer you keep it on deposit, the better your rate will be (in most instances). For example, the average rate on a three-year deposit is, at the moment, 0.49%. Also, this rate is usually locked in, meaning it is not subject to change based upon how well the economy is doing at any given moment. In general, share savings certificates offer a much higher return than savings deposits, if you’re willing to wait the time it takes to get your money back.

What are the risks involved?

First, if you decide to withdraw your money earlier than the term you’ve chosen, a penalty typically applies. On average, these will cost you between three and six months of earned dividends. Depending on when you decide to withdraw, this can cost you more than you’ve made in dividends if you deposit in a certificate and then immediately withdraw it.

There’s also the risk of inflation. Should you choose to keep the money in the account for years at a time, you could actually end up losing money when taking inflation into account. Unfortunately, the only way to avoid that is to withdraw your money and take that penalty. Of course, inflation applies to all savings strategies, even the “tin can buried in the yard” approach. Other than inflation and penalties, your money is safe.

What insurance do I have against loss?

At for-profit banks, all certificates of deposits are backed by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures them for up to $250,000. At a credit union, the National Credit Union Administration (NCUA) or a private insurance corporation (sometimes both) will insure your certificate for the same amount. The insurance works the same way, for the same amount, regardless of who provides it. This insurance for your money happens automatically and requires no action on your part.

If you’re unsure, look for stickers near the teller windows with the letters FDIC or NCUA. If you see these letters, your deposit is secured. If you don’t, be sure to ask the representative assisting you with your account about insurance for your deposit. They’ll be able to tell you the name of the institution that provides it. The FDIC and the NCUA will automatically back you and keep you covered through the worst of economic disasters.

What are some different options of certificates I can have?

Though people tend to stick with the traditional certificate option, there are many more to choose from.
A high-yield certificate is more or less an advertising gimmick for one institution competing with another one for higher rates. Sometimes, they do have the higher rates promised, but they usually come with loopholes or very high minimum deposit requirements to secure the higher rates. Rates also change frequently, so be sure to ask your representative what the current rates are.
A bump-up certificate allows your rate to rise. This means that, if the institution offers a higher rate after you’ve purchased your certificate of deposit, you can request to change your rate to the higher one. The downside is that they may offer lower initial rates.
A certificate sold through a brokerage is called (as one might guess) a brokerage certificate of deposit. These are less like traditional CDs or certificates and are more like stocks. These notes can be bought and sold on a secondary market.
A liquid certificate allows you to withdraw money at any time without penalty. Unfortunately, the rates are often much lower than the rate on a traditional certificate of the same value would be.
One to watch out for is the callable certificate. In this, the institution can “call” your deposit back. Typically these have much higher interest rates, which is a positive. On the flip side, your institution retains the ability to shorten the term and give you your money back without the interest you would’ve earned.
Is a certificate right for me?

There are many good reasons why a certificate would be the right choice. Certificates usually have minimum deposit amounts, so be sure you’ve got enough savings to spare that you can lock away a few hundred dollars, at least. If you’ve got trouble with impulse spending, certificates can be a great choice to lock your savings away from yourself. They also make an excellent vehicle for an emergency fund. Using a technique called “laddering,” you can take advantage of the higher rates offered by longer-term certificates while preserving the flexibility of shorter-term ones. If you’ve got the discipline to keep your money locked in a certificate for its term, you can seriously muscle up your savings. Stop by Great Meadow FCU to get the details on the account that’s right for you!

SOURCES:

What Is a CD (Certificate of Deposit)?
Certificates Of Deposit Aren’t Risk-Free
What type of CD account is best?

The Sky Isn’t Falling: Financial Repercussions Of The Brexit Vote

Listening to financial pundits, it’s easy to think that the end of the world occurred Thursday, June 23rd. The United Kingdom voted to leave the European Union in a contentious referendum. While the implications of this decision are many and wide-ranging, there’s no need to panic.
What the Brexit does

The referendum in the United Kingdom was to leave the European Common Market. The Market is a network of countries (called the Eurozone) that don’t charge each other import or export taxes and simplify the process for citizens of any Eurozone member to get permission to work in any other country. The Brexit vote means that the United Kingdom is leaving that network.

For citizens of the United Kingdom, this decision could have very serious implications. On one hand, the country will get more control over its immigration policy. It is no longer obligated to follow European Union rules on migration or refugee handling. The desire to secure their borders was, in large part, the motivator for those who voted in favor of leaving the European Union.

What most financial experts are concerned about, though, are the trade implications. The United Kingdom will have to negotiate its own trade policies with every other member of the Eurozone. Over the short term, this will be incredibly complicated. For the past 20 years, British trade policy with the rest of Europe has been determined by the Common Market rules. It will take time to reestablish trade policies with the many nations of the Union.

No need to panic

The one thing that drives markets down more than anything else is uncertainty. If no one has reason to believe that trade will occur and profits will be made, there’s no motivation to invest. That’s the current circumstance. There are no clear trade rules governing Britain’s participation in the Common Market, which is driving investors in both European and British markets away. This same fear is also impacting other markets of countries that do business with the United Kingdom. This behavior is driving concerns about a short-term recession.

Ultimately, trade agreements will be mended. The United Kingdom and the rest of Europe are too close, both politically and economically, to remain at odds for long. Business as usual will return sooner rather than later, and short-term losses will rebound.

This is small consolation to those who will lose their jobs due to the economic slowdown, though the most pronounced effects of this loss will be in the United Kingdom. U.S. companies that conduct a great deal of business with Europe and the United Kingdom may have some staff reductions, but job loss should be minimal in the U.S., at least over the long term.

Normalcy will return

Many doom and gloom economists and pundits predicting mass economic ruin rely on a number of things happening, each of which is unlikely. First, investors must abandon the Pound Sterling, the British currency, en masse. This is unlikely. The British government’s ability to pay its bills is still sound, and the currency holds enough value to resist the impulses of speculation.

Second, those who predict financial catastrophe assume a trade war will spark between the United Kingdom and the rest of Europe. Such analysis ignores the likely galvanizing effect that the Brexit vote will have on British moderate voters. As Prime Minister David Cameron has recently resigned, and with opposition leader Jeremy Corbyn likely to do the same, new elections will install a new British government shortly after the British leave the European Union. Those who were opposed to the Brexit referendum, but stayed home because they considered it impossible that the referendum would pass, will heavily influence this new government. These voters will elect moderate leaders capable of returning a degree of normalcy to trade relations, and thus preventing a trade war.

What this means for your portfolio

Over the short term, stocks and foreign currency funds will likely take a significant beating. Resisting the urge to cut and run from these positions will take discipline, but it will reward investors with the courage to ride out the storm. When normalcy returns to international trade, these positions will rebound. This sudden downswing may mean postponing retirement for a few years in order to take advantage of bargain-priced securities in the interim, but investors who sell now may end up regretting the decision.

For those still saving for retirement, it may be prudent to find another place to stash gain-seeking money in the interim. Instead of investing in the typical instruments, consider long-term share accounts. As governments in Europe cut interest rates in an effort to stimulate their economies, traditional safe instruments – such as government bonds – will lose some of their luster. Long-term share accounts will keep current interest rates through the economic trouble and provide a better 3- to 5-year return than many other traditionally safe investments.

The bottom line

The Brexit vote will likely cause some damage to the global economy, but the damage will probably be minimal. After an interruption of trade, everyone will get back to business as usual across Europe. Some companies may cut their staff down for a short time, but they will re-expand once the economic situation returns to normal. Keep calm, and keep saving.

SOURCES:

Some Possible Brexit Consequences

The 6 Biggest Consequences of the U.K.’s Brexit Vote, So Far

Beyond Brexit: The consequences of Britain’s great exit

We asked Mohamed El-Erian if there is a Brexit silver lining — he said there are two!