The more you risk, the more you make
In congressional hearings this week, Federal Reserve Chairman Benjamin Bernanke said the central bank would keep short-term interest rates near zero for the foreseeable future. This is good for borrowers. Not so good for savers.
How do you get a decent yield? By taking on more risk. This is why junk bonds have become popular. But you may wonder if junk bonds are a good idea. Could be.
The economy is sluggish at best, and the Fed has kept rates low to try and keep the economy inching along. Low rates let companies and consumers refinance older, more expensive loans. And low rates help companies borrow for expansion, although few are taking out new loans these days.
If you’re looking for a safe, high-yielding investment, however, you’re just out of luck. The average money market mutual fund yields 0.04 percent or $4 a year for every $10,000 you invest. The top-yielding one-year bank CD pays 1.55 percent.
If you’re trying to get more interest from your investments, you have two ways to do it. The first is to lock up your money longer. To get higher yields, you have to take on even more risk, which means investing in corporate bonds. These are long-term, interest-bearing IOUs. The company will pay you a set amount of interest until the bond matures, which is when you’ll get your principal back. The risk is that the company will go bankrupt before your bond matures.
The rip is that there isn’t much return on corporate bonds either. High grade corporate bonds yield about 1.32 percentage points more than comparable Treasury securities.
To get really high yields, you have to take considerably higher risks and invest in junk bonds, which are high-yielding loans to companies with poor credit risks. But what are the risks with these?
There is a risk of default. The peak default rate for junk bonds was 14.5 percent last November, and it was 6.3 percent in June. There’s also a risk of loss. The average junk bond lost 30 percent last fall.
But the reward is that the average junk bond is currently yielding about 8.43 percent.
The prognosis for the economy, according to many experts, is that it will creep along in a slow growth period. The good news about the recession, relative to junk bonds, is that it cleaned out the weakest junk bonds, so the ones that are left are the “good” ones. Relatively few new junk bonds are coming to market, so as demand increases, junk prices should rise.
However you choose to invest, do so carefully, and don’t be afraid to get the advice of a financial adviser or trusted friend. The only stupid question is the one you don’t ask.
Is saddling the little guy with more debt the answer?
Banks across the country are denying loan requests from financially credible small businesses. Federal Reserve chairman Ben Bernanke has urged community banks to lend to small businesses, calling it “crucial to America’s recovery.”
Lenders say they want to help the small business owner and the economy, but there just aren’t viable borrowers. This is due, lenders say, to the fact that the loans needed by small business owners are for one of two reasons: helping a business stay afloat or business expansion. And with falling real estate prices, many small businesses don’t have the necessary collateral to back up their loans. Banks are feeling picked on by the federal government, which keeps pushing for new lending.
So why would a small business owner want to borrow money right now? The average answer is to reduce debt levels, a smart choice in a depressed economy. The other concern for the small guys is the new health care reforms and how they will affect businesses with fewer than 50 employees.
Washington has ramped up pressure on community lenders as well as large commercial banks to set up small loan funds. Regulators have attempted to grease the wheels with a program called TARP Jr., a $30 billion dollar small business lending fund for community banks.
But if most banks are claiming there are no viable borrowers, this doesn’t seem like much of a solution.
But something has to be done to give a boost to small business, which employes about half of Americans and accounts for 60 percent of new jobs. Will pushing loans on them be the answer?
The experts aren’t too sure. With consumer spending down and the overall economic climate unsettled, entrepreneurs don’t seem to be confident that this investment in the U.S. economy will pay off. And they fear that the little guys will be saddled with bigger debt.
One answer could be unsecured loans. A small business owner can obtain a loan from $10,000 to $5 million, with no collateral, minimal documentation, no annual fees and no prepayment penalty. All with rates starting at 7.93 percent.
The doctor is in: Time for a mid-year financial checkup
Summer will soon be over and the year is half done – it’s time for a mid-year financial checkup. You should take the time to assess your finances and make sure you’re ready for the rest of the year. Doing so at this juncture can give you time to make the corrections that could salvage your financial standing.
First of all, take a look at your spending. Compare your cash flow for the first six months. Did you allocate enough to cover expenses or are you falling behind in certain areas? If you skipped setting up a budget to begin with, remember that solid financial planning begins with having a budget. There are plenty of tools to help you get started. Check your bank’s Web site, or look to see if your smart phone has an application that can help you track your spending. Good, old-fashioned paper and pencil work, too. The key is to put a plan into place and stick to it.
Second, look at how much you are saving. Just a small amount of savings can play an important role in your overall financial picture. You should be saving for both long- and short-term goals.
Consumers have been paying down their debt, and banks have been writing much of it off. But there’s still plenty of debt piled up. Carrying high debt loads can have a big impact on your credit score, make monthly budgeting more difficult and leave you more vulnerable in an emergency. If you are only paying the minimum on credit cards or are, worse yet, skipping payments, you could be headed for trouble. The first step toward resolving these problems is to stop using plastic and chart a plan for paying off your cards. Seek help if you can’t do it alone.
The area of taxes is uncertain still, because Congress has not yet addressed a number of expired tax laws. Anything can happen before the end of the year. Tax rates are expected to go up for all but the lowest income brackets in 2011. You may want to get tax advice before converting a traditional individual retirement account to a Roth IRA. Those conversions are intended to reduce taxes when it’s time to withdraw the funds, but the uncertainty of the tax laws and individual circumstances means switching may not be the best move for everyone.
One of the biggest blunders most people make is not putting enough money into a 401(k) plan to meet the match provided by their employers. The flip side is putting so much in that you reach the maximum allowable too early in the year and miss out on company matching for the remaining months. A review of your retirement plan starts with your 401(k) but doesn’t end there. It’s important to go through the process of looking at all your retirement avenues, including Social Security and company pensions, and figure out how much you will need to provide for yourself and your loved ones. It’s much easier if you ask an expert for advice.
The goal is simple: make sure you’re on track. Be honest about where you are, and if you don’t already have clear, concise goals, both immediate and long-term, it’s time to set them.
Swipe fees debate continues
Swipe fees or no swipe fees – the battle rages on. The increasingly-heated debate centers around the approximate $48 billion that merchants pay to banks and credit card companies for the use of credit and debit terminals. Swipe fees are now being fought over in a congressional conference committee that’s considering a package of reforms for the financial services industry.
Sen. Dick Durbin, D-Ill., introduced three amendments to the bank reform bill to control how much credit card issuers charge merchants when consumers pay with a credit card. The measures would make several changes. From the banks’ perspective, it would require the Federal Reserve to set reasonable and proportionate fees that merchants will have to pay banks, and Visa and MasterCard, to process debit card transactions. Merchants currently pay a percentage of the total transaction, not a set fee based on the cost of the transaction. The new measures would give merchants more control over the transactions.
Some are calling the measures unfair, saying the cost to use credit cards gets passed around to everyone, including debit card users. It’s been called a social fairness issue because lower-income consumers and subsidizing a “first class upgrade.” Swipe fees are set by MasterCard and Visa, and average about 2 percent for credit card transactions, and are higher for rewards or corporate cards.
Banks don’t seem to care much about social fairness, with $48 billion at stake. They’ve mounted a major lobbying campaign to oppose the proposals. The American Bankers Association says the debit card issue has nothing to do with the financial crisis and does not belong in the financial reform bill.
The proposals would also have a dramatic impact on merchants, who have seen credit and debit processing fees increase more than five times what they paid a year ago. These merchants say they are paying for the reward points and air miles.
Durbin’s measures also call for the lowest rates possible to apply to government credit card transactions, noting that consumers are using credit cards to pay their taxes, toll fees and dog licenses.