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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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Monday, April 28, 2008

Out Of The Blue...


We've had the equipment for weeks. What we didn't have was an installer. The company couldn't seem to locate one willing to come to our remote high desert location. Naturally, they made no mention of that potential difficulty when they took the order.

So, we held the equipment through installation cancellation after installation cancellation. We just had our appointment for April 30th recently canceled, as the closest installer had to drive 800 miles and had yet to schedule other installs in the area.

And, then, out of the blue, this past Saturday, installers arrived with no notice. After, of course, I'd contacted another satellite company because this one couldn't seem to get the job done. Naturally, their website is just as good as their customer service and I cannot get into my account and will have to go somewhere to call them, as there is no way to e-mail their support system. That doesn't surprise me, ha ha ha.

All that, though, seems fairly small in comparison to this great leap forward for us here in the desert. I can now work from home again. The past few weeks of me having to go out to work have been very stressful for the children. I've always been at home with them. With everybody -- my sister and my brother -- having daily access to the Internet, everybody can get back to work and we can start moving forward with a variety of essential projects, like solar panels to run the modem so we don't have to use the gas powered generator as much.

With all that is in the news today -- food shortages and rapidly increasing prices, oil prices skyrocketing, the dollar continuing its fall, an epidemic of struggling mortgagees, a tidal wave of foreclosures, and the potentials that lie underneath the staggering burden of consumer debt -- our efforts towards sustainability and self-sufficiency seem quite timely and more important than ever.

The path for some of our nation's banking and lending institutions seems inevitably to lead to failure. Already sustaining significant losses from the sub-prime mortgage and lending debacle, many of these institutions are now having to deal with consumer debt gone bad. Economically stressed consumers have been missing payments as they struggle to make their salaries extend to cover the most basic of needs as the costs of those needs move steadily upwards.

That oft repeated Chinese curse -- not the one referring to flooding the market with cheap consumer goods, but the one that says may you live in interesting times -- appears to be an apt description of our current situation. Very interesting times, indeed. To me, everything going on today indicates an imperative need for preparation -- reduce debt, increase savings, and stock the shelves.

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Tuesday, November 27, 2007

My Neighbors Are Slobs

I'm still renting, because I like my place, I'm paying a fair price in rent and I have a very ambitious goal of buying my home with cash when I am ready. Very ambitious.

In case I'm not able to save up enough, my backup plan was to get a "no documentation" (or "no doc") mortgage from a reputable bank. With a no doc mortgage, the borrower generally has a very good credit score, and is only required to present the lender with a social security number and details about the property in question. These loans are often called "liar loans" because certain folks who go for them don't make enough money to afford the mortgage.

But I'm not interested in a no doc because I don't make enough. I like the idea of the no doc mortgage because I have a high credit score and, because I'm self-employed, my income fluctuates.

Of course, with all the fallout from the subprime mess, no doc loans have all but dried up. I've come across a couple of lenders still offering no doc loans, but I wouldn't borrow from the ones I found in my most recent and cursory search. These lenders weren't offering loans from the back of an old van, but they still had some shadiness about them (sales pitches that were akin to those cheesy, late-night infomercials.)

One thing I hate about renting, which had me daydreaming about owning my own place today, is the fact that I can't control who ends up renting the townhouse next to mine. Of course, even if I owned my own home, I wouldn't be able to control who ends up living next to me, but the turnover in my apartment complex is very high (the complex owners raise the rent every year, and based on conversations I've had with former tenants, I think most people don't bother trying to negotiate the rent increase.)

Up until the beginning of 2007, I was lucky because the folks who rented the space next to me were OK. But about 7 months ago, a bunch of slobs moved in. I think it's five adults and a preadolescent boy living in that place, and all of them smoke (the kid doesn't smoke, obviously, but he gets to enjoy unfiltered cancer gases when he's home. Sweet!) They often leave their cigarette butts everywhere. They have lots of friends visiting, and they all seem to be smokers as well. The butts are annoying, but not as annoying as this:

my neighbor's garbage


The hillbillies next door sometimes leave plastic bags full of trash outside, uncovered and unprotected, so the cats and raccoons get into it late at night and leave a disgusting mess. Soooo lame, especially because the dumpster is no more than 15-20 paces from their front door. This kind of despicable laziness just boils my blood.

I've spoken to them about it in the past. They apologize and tell me that they'll clean it up, and about half the time they don't bother keeping their promise.

So about two weeks ago, I started throwing cups filled with undiluted bleach on their side, on top of the mess, on the ground and on their door. That swimming pool smell of bleach doesn't bother me one bit -- it's the smell of clean, the smell of germs dying -- but it got to them. They asked me if I was throwing the bleach, and I denied it. I told them that I thought I saw some of the complex's groundskeepers doing something near their door. They haven't left trash outside since.

Do I feel guilty about throwing bleach and denying it? Heck no! I should tell them that I threw the bleach so they can retaliate? I don't think so. All is fine now. No more trash everywhere, and they get to grow up a little.

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