Building a CD Ladder

While online savings accounts offer good rates, we can boost returns (for very little risk) with a CD ladder.

Why it works: In return for locking up your money for a fixed amount of time, banks are willing to pay you a higher interest rate on your money. For example, ING Direct pays an APY 2.75% for money in its online savings accounts. In contrast, a 1 year CD at ING Direct pays 4.00%. As you can see, you are earning more interest on the same amount of money.

How it works: By investing your money in CD's that mature at regular intervals, you get the benefit of higher interest rates without having all your savings out of reach.

Example of Simple CD Ladder: You have $4,000 to invest and want to have a one year ladder. Buy four $1,000 CDs with terms of 3mo, 6mo, 9mo, and 1 year. When the 3,6,9 mo CDs mature, replace with a a new 1 year CD. Ultimately, you end up with four 1 year CD's. Should you need the money, one of them will be maturing every 3 months. My bank, ING Direct, will automatically reinvest maturing CD's for you.

Example of Complex Two Year Ladder: Let's say you have $24,000 to invest, you could set up a ladder of 2 year $1,000 CD's maturing every month. Ultimately, the complexity of your ladder is up to you as the combinations are virtually unlimited.

Risk: If you have an emergency and need to get your money early, you will get all of your principal back. You will, however, forfeit some of the interest earned. The money invested in a CD ladder should be money you do NOT expect to need in a "common" emergency (car breaks down, medical bill). The longer the term of your ladder, the more risk you have of having the dreaded "early withdrawal" penalty. In my case, I use a one year ladder because I like the idea of accessing 100% of the money within 12 months.

Bonuses to look for:

1. Size Matters: CD's have transaction costs for the bank. As a result, they are likely to incentivize, with higher interest rates, you to have fewer, bigger CD's. In the case of the 2 year ladder described above, it is likely you would be better off buying four large CD's instead of 24 small CD's. So-called "Jumbo CD's" may be a good idea for some investors.
   
2. Time Periods: Although banks often pay higher interest rates on longer term CD's, the "best" rate is not always the longest available.
   

NEVER, EVER DO THIS:     NOT EVER

1. Invest in CD's of foreign banks. Many an investor has been scammed by con artists promoting "guaranteed" CD's in banks domiciled outside the US.
   
2. The FDIC is your friend. Do not invest in CD's lacking FDIC insurance. In addition to making sure you do not invest in banks lacking insurance, make sure you do not invest money in excess of the FDIC limit (currently very high).
   

Thoughts on Muni Bonds

With respect to municipal securities, it is an "interesting" time. Unlike treasuries, muni's are not considered "risk free" and they have offered an after-tax yield (AT Yield) higher than available through treasuries. Compared to historical norms, the spread between the AT Yield and the yield on treasuries is high. Why? Many muni borrowers are faced with declining revenues (taxes and use fees) as the economy sours.

Before anyone invests in munis, they need to know there are two types of municipal bonds.

1. General Obligation Bonds – backed by the full faith and credit of the borrower, they are considered "safer" than revenue bonds. Bottom line, the creditworthiness of the critical to valuing GO Bonds.
   
2. Revenue Bonds – not backed by the full faith and credit, the "payback" of the bonds depends upon the revenue generated by the project backing the bonds. Common revenue bonds – infrastructure (sewers, toll roads, etc.) and special projects (stadiums). If the project fails to generate enough income to pay the interest and principal due on the bonds, the issuer is not legally responsible for making you whole.
   

Because I perceive the overall risk of munis as manageable, I have money invested in a tax free money market fund and think many of them offer a fair risk/reward at current pricing. Nevertheless, I would avoid a few issuers like the plague:

1. New York State and New York City. As Wall Street prospered, employers paid enormous bonuses to employees of investment banks, hedge funds, and other financial professionals. Eventually, both the city and the state became dependant on income taxes on these bonuses and taxes on things purchased with bonus dollars (real estate, sales, etc.). With "bonus" tax revenues gone for the short term (and probably the long term), both the city and state face enormous annual budget holes.
   
2. California: Enormous government spending and the implosion of the housing market is a bad combination.
   

 

 

Black Friday Purchases Report

Getting up early, the wife and I went out on a quest to spend our way into a economic recovery for the US. Starting at 6am at Target #1, we ended up going (in order) to Best Buy, Target #2 (to return a GPS), Home Depot, Staples, WalMart, BJ's, Michael's #1, Michaels#2, and BJ's.

Ultimately, we ended up purchasing three GPS units (returning two), two Blu-Ray DVD players, and a Christmas tree.

The GPS unit was the primary reason for a odyssey of shopping. For months, we have been planning to buy one as a gift to my mother in law.

The Blu-Ray was a splurge as we picked up a $300 unit on sale for $199. It will be our Christmas gift to ourselves.

Finally, the Christmas tree was at a great price and should last us for years.

What I saw: Flat screens were selling fast, Home Depot was empty, WalMart and Target were crowded and people were buying.

Thanksgiving - Sadness

1. After the Thanksgiving parade, my wife and I decided to get out of the cold and get some hot food before going home. Sadly, there were more than a few "singles" in the bar on Thanksgiving.
   
2. Beside the Henry Hudson Parkway, we saw two separate men "camping" in freezing weather. Please say a prayer for their health and wellbeing.
   

Macy’s Helps Me Out

Things did not go smoothly, but my local Macy's eventually did the right thing for me. Looking to buy a new winter coat, my wife and I went on Sunday. Instead of having the winter coats in the same area, they had them for sale in different locations throughout the store. After spending an hour looking and trying on coats (on two levels of the store), we found a nice, single breasted Calvin Klein in a $150 rack (along with many double and single breasted). When we tried to check out, the clerk said it was a different "style" from the ones on sale and was $400. When he went to look at the sale rack, it took him almost 15 minutes to figure out why.

Today, I spoke with the store manager and he agreed to honor the price.

$1.87 gallon for gas

I cannot believe it. I found gas for $1.87 per gallon. When it gets below $1.50, I am going to start investing in auto companies. Buy Low – Sell High

Citi’s Competitors - Competing with Govt?

If your company competes with Citibank, how can you win? Clearly the government has decided they are "too big to fail." Let's say you are a regional bank and you have made good decisions with your loan portfolio. In normal times, you would be the big winner and would be able to steal business from Citi. Now, everyone knows mistakes by Citi employees will be covered by the government. More importantly, Citi employees know it.

Let's say you are a loan officer at Citi. Compared to a loan officer at Regional Bank, you will be more likely to close that difficult loan.

Psychics for Financial Advice – NY Times

Now, the New York Times is writing about people going to a psychic for financial advice. http://www.nytimes.com/2008/11/23/fashion/23psychic.html?_r=1&hp

Even though they aren't endorsing it, bringing it up as "an option" is deplorable. They should be giving legitimate guidance to readers.

Backlash against Automakers

Much to my surprise, it looks like the imbeciles running congress (and Obama and Bush) have realized that giving the Big Three $25B is the financial equivalent of flushing it down the toilet. Please understand, I do hate unions (indeed my wife is a member of one). Nevertheless, a bailout will require the following:

1. Bankruptcy – this will allow the big three to cancel their union contracts and rehire workers without legacy costs (Retiree Healthcare).
   
2. Restructure their plans to a word dominated by cars – not SUV's.

Thanksgiving for Two - Ideas?

My wife and I are having Thanksgiving alone this year. Does anyone have any good recipes/ideas for Thanksgiving for Two? We are thinking going out might be the best way to have "all the fixin's" without spending an arm and a leg. Thoughts?

Injured at Work – Workers Comp

A few years ago, I had the misfortune of blowing out my knee. As an insurance professional, I expected to be treated like I treat my customers. What actually happened?

1. The claim representative lied to me about what I was required to do. In particular, she stated I was not entitled to a copy of my recorded interview and that I was required to sign an "unlimited" medical release.

2. Later, I discovered she lied in her claim log.

3. Ultimately, they denied my claim. They claimed a knee injury in my 30's was related to a knee injury when I was ten years old. The fact I played years of football and lettered in wrestling were not relevant to them. The fact I missed a total of THREE days work because of a major knee surgery was not relevant.

4. All I wanted was to have my medical bills paid. Had they paid them, I would have never gotten attorney and would not have pursued ALL my legal remedies.

Luckily, most claims professionals are not idiots and/or liars. Thanks to my attorney, I got was I deserved.

Insurance – Last Man Standing

During a unit meeting, the state of our industry (insurance) came up. Listening to how all the carriers (including ours) are being punished by the stock market for bad investments, I got to thinking about who would win the battle for Last Man Standing.

Frankly, it is frustrating and I am angry. Insurance carriers have people who are paid to take risk and charge an appropriate premium for it. Although not perfect, carriers are experiencing underwriting results are well within acceptable ranges. Nevertheless, all of us are getting hammered because the investment geeks, who are paid to keep premium receipts safe, didn't do their jobs.

Are we circling the drain?

Looking at the market crash day after day, I cannot help wonder: "Are we circling the drain"
1. Banks – RIP

2. Automakers – Dead, but just don't know it

3. Insurers – on life support

4. Retailers – Dreaming that this will not be their "Last Christmas"

GM Card – Rebates if GM goes under?

If GM goes under, will people with "Rebates" on their credit cards become creditors of GM? Although I am not sure, I suspect the credit card company will be a creditor of GM and we will continue to be creditors of the bank.

10% off Kobalt Tools

If you need any tools, Lowes is offering 10% off all in stock Kobalt tools through tomorrow. This is part of their celebration of Jimmy Johnson's 3^rd Sprint Cup Championship in a row. Great deal if you like their stuff.

Insider Trading – Mark Cuban Indicted

Do not anger Federal law enforcement agencies unless you are willing to fight – sometimes for your freedoms. According to news reports, Dallas Mavericks owner Mark Cuban has been indicted for insider trading. Until he is proven guilty, Mr. Cuban is innocent as a matter of law. Nevertheless, his aggressive attacks on the SEC has involves serious risk. Given the severity of his attacks, he is unlikely to be able to negotiate a friendly, favorable settlement.

Bottom Line: It looks like he will be going to trial. As a Mavericks fan, I hope he doesn't end up like Martha Stewart.

    

Group Life Insurance – Not Enough

It is a good idea to have your own policy outside of employment, even if you have access to group insurance. In my case, my employee pays 3x my annual salary. Nevertheless, an individual policy is an important part of any financial plan.

1. Group rates are not "underwritten" and thus rates reflect the good and bad risks within the underwritten pool. When you are young and healthy, you are overpaying for insurance.
   
2. If you lose your employment, they are required to offer you a "conversion", but it doesn't have to be a good one. When I left my last employer, the conversion was a whole life policy at something like $500 per month.
   
3. You can shop around for the best rate that fits you needs.
   

IMHO – term insurance is almost always better than whole life.

UAW Tries to Kill Big Three Automakers!!

It looks like the idiots running the UAW are not content with forcing the Big Three automakers to beg Congress for $50B. Now, they are looking to actually kill them off. Ron "No Brains" Gettelfinger has announced the UAW will not make ANY concessions to save the Big Three.

Honda and Toyota can make money selling cars made in the United States. Why? They are not stuck with crippling UAW rules. Now, the UAW wants taxpayers to give the Big Three $50b to subsidize three businesses that cannot succeed unless they change everything (including their Union contracts) about their businesses.

Pay Full Price for Infants – Poll?

A story in today's New York Post makes a big deal about Carnegie Hall charging full price for infants even if they sit in their parent's laps. On the one hand, I feel sorry for the parents. Nevertheless, I think some parents feel "entitled" to special treatment without regard for others. In this case, I would not want to be in the seat next to a parent with a child in her lap. There is a 100% chance the child would get into the neighbor's space.

http://www.nypost.com/seven/11152008/news/regionalnews/one_hall_of_a_nerve_138837.htm

HIG – The Hartford is now a bank?

When I got home, the news reported The Hartford (HIG – aka Hartford Financial) was converting to a savings and loan. According to the reports I have read, this will allow HIG to take advantage of the federal bailout of banks.

My thoughts:
1. Hopefully it will work. HIG is a major employer in the area and I don't want mass layoffs in my area.

2. Bailout mania seems to be spreading to everyone. I cannot wait to see Walmart convert to a bank to get federal cash?

3. Hopefully, HIG senior execs in the life insurance operation (and in corporate) who caused the debacle will be forced out and will be replaced by better stewards of policyholder and shareholder funds.

 

Full Disclosure – I was once an employee of HIG.

My best investment!

My lovely wife.

Best Adsense Search Term – Mesothelioma?

On another PF website, I heard Mesothelioma was the best "search" to earn adsense dollars. After I tried it, I discovered it actually works. Why? I have no idea.

Porno – Solution to Financial Problems?

If you have financial problems, you should consider making a porno movie to solve your problems. At least, that is the premise behind Zack and Miri Make a Porno. Since I like the actors, I decided to check it out. From the movie, I have identified some key "flaws" in their plan:

1. Their biggest problem was spending brought on by poor impulse control. If you spend your rent money on skates "because I needed them," you are going to have problems.
   
2. Instead of porno, try getting a 2^nd job and/or a better job. Barista is not a high paying job.
   

401k – no more Stable Value Fund

Until this week, the safest option available in my 401k has been a Stable Value fund. Although not the riskiest of investments, a safe investment should be truly safe. Luckily, my employer added a money market fund (treasuries only) to our options.

$2 Gas – I will find it!

My new "fun" goal is to spend less than $2 per gallon on gasoline. While I know people in other parts of the country have pulled it off, my state has high gas prices that have made it impossible for quite some time. Yesterday, I paid $2.18 at BJ's Wholesale.

Socialist Win in US Elections?

Now that Obama has won and the Democrats are in complete control, let's hope the Democrats on the left don't lead the more reasonable Democrats towards "socialist" policies. Already, I am worried by their constant call for "universal …."

Housecleaner’s Big Home

Once again, the WSJ has found another example of mortgage madness that is hurting us all. Without any irony at all, they introduce us to a couple with a combined $70,000 in income who managed to borrow $637,288 for their home. Ain't America Great!

 

"Nanci Puerto, a 40-year-old house cleaner in Antioch, ran into such a problem. She refinanced her house for $637,288 from IndyMac in 2006, taking out cash for a down payment on another property. She and her husband, who works in a machine shop, take home a combined $70,000 a year. Each month, she makes the minimum payment on her loan, $2,416. At the same time, she watches the outstanding principal swell since that payment doesn't fully cover the interest costs. Now she owes IndyMac $707,000, on a house that the county tax assessor says is only worth $410,000." http://online.wsj.com/article/SB122548504641688959.html

Expect Insurance Rates to Rise in 2009

One of the ways insurance companies make money is by investing premium dollars. Unfortunately, like everyone, they have lost money. Without the prospect of investment income, they are going to need to rates.