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Tuesday, October 14, 2008

Is 5.00% APY On A 3-Year CD A Good Deal Right Now?

stock market crashWith all the chaos in the American banking system going on right now, consumers across the country are looking to for the safest place to store and grow their hard-earned dollars. The stock market crashed last week, with double-digit declines for each of the 3 major indexes. Though American equities regained some ground today, we are still dealing with a serious bear market. From the Prime Rate website:

"...Since closing with record highs on October 9, 2007, the DJIA has now lost 5,713.34 points (40.336%), while the S&P 500 Index has declined by 665.93 points (42.547%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15..."
Most of us don't trade individual stocks on a regular basis, but most of us are linked to stocks by our retirement savings, like 401(k) and 403(b) plans. The waning stock market is especially bad news for those near retirement, as most portfolios have lost a lot of value this year.

I Am Grateful for The Conservative Ways of Credit Unions

Back in 2003, when the Federal Reserve dropped the fed funds target rate to 1.00%, which in turn caused the U.S. Prime Rate to drop to 4.00%, I was very interested in a credit card on offer from my credit union. The APR was 6.99% fixed, and the typical credit line for this particular Visa® card was $5,000. I wanted this card bad, not just because of the interest rate, but also because it was from my credit union, and I knew that the term and conditions associated with this card would be more consumer-friendly than any card on offer from any traditional bank.

When I applied for the card, my application was met with fierce resistance. My credit score wasn't that bad, but I was, and still am, self-employed, so my credit profile must have caused one or more red flags go up. The loan offcredit cardicer who reviewed my application asked for 2 years of tax returns and proof that I was making the money that I claimed I was making on the application. I submitted all the documentation they wanted (took about a week to fax it all), but, in the end, my application was rejected. I did not received a canned "dear john" letter from the credit union. The loan officer called me at my home and explained that the credit union could not approve my credit card application because I did not have enough collateral with them, i.e. I did not have enough cash on deposit. I was told that I could reapply at any time. That rejection was painful, but I understood: the best credit cards on offer from the best financial institutions will only go to consumers who are very secure financially. If I had around $5k in my saving or checking account, I probably would have been approved.

Play it very safe; lend conservatively; don't lend unless the member has been thoroughly vetted. It's because my credit union stuck by these principles that it has managed to avoid the financial ravages caused by the excesses of Wall Street investment banks and the debt associated with lending hundreds of thousands of dollars to first and second homeowners who couldn't afford the monthly payments. Wall Street banks like Citigroup® chased the 11%-13% returns promised by super risky mortgage-backed securities, and, when the subprime fiasco was unfolding last year, ended up paying 11% on a loan from the sovereign wealth fund owned by oil-rich Abu Dhabi. Bottom line: Citi® was relegated to subprime borrower status because they got sloppy and too greedy. They were, in essence, issued an 11% APR subprime credit card by a foreign government that makes unbelievable sums of money for doing next to nothing. How's that for irony?

Is 5.00% APY On A 3-Year CD A Good Deal Right Now?

Right now, financial institutions are really into Certificates of Deposit (CD's),credit union CD rates as evidenced by the high yields being offered these days. A week ago, my credit union was offering -- and they were pushing this offer very hard -- a generous 5.00% APY on a 3-year CD (CD's are called Share Certificates at credit unions), which may seem kinda' weird, because, as you can see in the screen capture image I've posted to the right, the rates on offer for 42 and 60 months are lower. Should be: the longer you let them hold your money, the better the interest rate you get, right?

The target rate at which most healthy American banks and credit unions can borrow overnight funds from each other via the Federal Reserve -- the target fed funds rate -- was lowered to 1.50% last Wednesday, and is expected to be lowered again at the October 29 FOMC meeting. With all the turmoil in the credit markets, the Fed has allowed financial institutions to borrow vast sums at very low interest rates and for terms much longer than overnight[1][2][3]. But the prospect of locking in a rate of 5% for 3 years is very tempting for my credit union, because they know how rates are going to look about a year from now.

With all the money the Fed is dumping into the American and international banking systems, the price we'll all have to pay for the Fed delivering truckloads of cheap cash at the doorsteps of our bankssavings and nest egg is inflation. A lot of money is being dumped in an effort to loosen up frozen credit markets, and this will inevitably translate to high inflation down the road. The Fed will respond to runaway inflation by raising interest rates, no matter how anemic the economy is. Since all that money that'll be sloshing around in the economy is likely to cause inflation to accelerate at a fast clip, the fed funds target rate (FFTR) will likely be raised to a relatively high level. The median FFTR from 1990 to now is 4.5%; the average is 4.367%. Don't be surprised if the FFTR is 6.0% or higher 12 months from now.

So if my credit union can lock in 5% for 3 years, and the FFTR will go to 6.0% or higher within 12 months or so, then you can see that my credit union will have gained the advantage by the time the CD matures.

So, is investing in a 3-year CD @ 5.00% APY a good idea right now? Absolutely! But, if you can, go for a 12-month CD for now, or reserve as much cash as possible for next year. When the Fed ends the next cycle of raising the FFTR, I'm betting that you will be able to get even better returns with 3-5 Year CD's, so much better that I'm confident it'll be worth the wait.

Yes, I am grateful for my credit union. My Roth IRA has continued to grow despite all the nonsense going on in the banking system. And I'm confident that I have nothing to worry about.

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Tuesday, August 12, 2008

The Expensive Road Trip To Hell and Back

Life isn’t fair. Perhaps you have learned this tidbit already. Family court really isn’t fair. You may not have learned this already.

When I divorced my ex, I didn’t realize that the share of justice pie you get largely is determined based upon how much money you can shell out to hire a lawyer. My ex’s family re-mortgaged their expensive suburban Philadelphia house in order to hire him a lawyer. My family smiled and said, “Good luck with that!”

I hired the best lawyer I could almost afford and wracked up debt on my credit cards paying for his services. That was a bad decision, but the only one I had really. My ex was abusive and I really feared for the safety of my children. So my choices were: fight for my children or go into debt. I chose the first option.

Years went by and I happened to go into a coffee shop one day while the kids were visiting their dad. I met the most wonderful man who was a soldier visiting the area for some training. He lived over 800 miles away near the beach in Virginia. We ended up exchanging information after we’d finished our coffee and went our separate ways. I really didn’t expect anything to come of it at all, but life rarely turns out like we expect.

Fast forward a year or so and we are preparing to get married. We went to court to work out visitation because my ex frankly asked the court to NOT allow me to move out of state with the kids. I assumed that the judge would give us a standard “long distance” visitation arrangement. You know, the non-custodial parent gets the summer and long school breaks. It didn’t work that way.

Incredibly, the courts ordered me to meet my ex half way each month in DE to exchange the children with him. Some months, with holidays and breaks, it is even two times a month. The visits are from Friday to Sunday (normal visits, not the holiday breaks) and take approximately 16 hours to complete. With gas, tolls and food costs, we are spending an incredible $500 a month if we have to do 1 visit. This month, we will make two trips—spending an astounding $1000 to obey a court order. His regular monthly visitation occurs a week after his court ordered Labor Day holiday visit and so, in the space of 6 weeks, I will spend $1500 on visitation. Of course, the total amount of money the trip costs depends upon the wildly fluctuating price of gasoline. The ironic thing—he has been court ordered to pay me $930 a month for our 4 children. I spend more paying to take them to visit him than I actually get in child support.


For him, this is really no big deal. His family feels sorry for him and pays all of his expenses, including a rental car to make the trip and reimburses his gas money. I do not have a financial fairy Godmother.

In order to ask the court to re-consider, I would have to save up a retainer fee of $5000. I have asked my ex to re-consider, but he refuses. I have caused him great pain by remarrying and getting on with my life, and he wishes to make it most difficult for me.

I try to not let it get me down…and think of all the things I could do with that money. Right now, I am trying to get the kids ready to go back to school, and that $1500 could surely buy a lot of clothes, backpacks and school supplies. It could also buy a lot of food. But I have no choice. If I can't make those trips, I risk being sued for contempt of court. Conceivably, if I was found guilty, my children could be taken from me and given to my abusive ex.

This month, to make the budget work, we’re eating a lot of Macaroni and Cheese and other pasta meals. I’ve found that if we eat soup once a week, that really helps the budget too. I’ve bought a bunch of back to school clothes at the local thrift stores and I shop on half price Wednesday in order to stretch that already pinched budget even further. I have even learned how to cut hair in order to minimize our expenses even further. As gas prices continued to rise this summer, we cancelled our vacation plans and other fun events we’d planned in order to be able to afford to pay for the trips I was court ordered to make.

Some days, the stupidity of it all really gets to me. My youngest child is 9 years old and I simply can't imagine having to do this for 9 more years, but what choice do I have? With how tight the budget is, there is no money left over to be able to save to go back to court to ask the judge to re-consider the current arrangement.

I don’t for a minute regret marrying my current husband and moving. My children are doing very well and loving life near the beach. Yes, moving was one of the best decisions I ever made. But if I had to do it all over again….I think I’d ask my husband to move too…and we’d go across the country, where no one would tell me I had to go through this insanity every single month. Sure, it would mean purchasing plane tickets several times a year so the ex could get his visitation, but think of the money I’d save!

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