Fixed Income Strategies to Help Boost Savings Interest Rates

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Savings Coin BoxIf you take the 120 minus your age investment allocation rule to towards retirement, the conclusion is that your investments should mostly be in safe “bond” investments and out of risky “stock” investments. Since you no longer have the time to wait out the volatile swings of the stock market, you are advised to be invested in “fixed income” investments, like bonds.

Unfortunately, even with all the strategies below, nothing replaces the dependability and safety of a high yield savings account. The days of exceptionally high yields protected by FDIC insurance are gone until we see the stock market reach its once lofty heights but hopefully some of these strategies can bridge the interest rate gap without introducing too much risk.

Fixed income investments are usually safe investments that give you a fixed rate of return. The safe part is really a relative term, as bonds are only as safe as the ability for the bond issuer to pay the fixed interest rate. The idea is that you pick stable companies or municipalities and you have a reasonable expectation that the interest will be paid. How do we use those principles to find similar “investments” to boost our savings rate?

Reward Checking Accounts

Reward checking accounts are checking accounts that offer a much higher than average interest rate if you satisfy certain conditions. You are usually required to use their debit card 10-12 times a month, use their billpay system, direct deposit your check, and sign up for paperless statements. The higher interest rate applies only up to a certain balance, usually around $25,000. They are able to offer this higher interest rate because it’s paid for by the debit card transaction fees.

How good are the rates? As of this writing, lists the top reward checking account rate is 4.26% APY from NBRS Financial Bank for up to $25,000. While this isn’t strictly a fixed income strategy, it is an FDIC insured way to boost the interest rate on your savings.

Municipal Bonds

When your local or state government wants to borrow money, they don’t go to the local commercial bank. They issue bonds and sell them with the help of an investment bank. You can buy municipal bonds directly from the municipality/state, if you meet their minimum purchase requirements, or you can buy them on the secondary market. While there is a possibility that the government will default on the bonds, it’s still safer than a lot of other investments.

One of the benefits of municipal bonds is that the income from the bond payments are given favorable tax treatment. They are usually Federal income tax free and, if you live in the issuing municipality, state income tax free as well. Before you purchase a bond, be sure to confirm this as there are some exceptions.

Dividend Stocks

One of the benefits of researching fixed income strategies when you’re under 30 is that you’re able to take on a little bit of risk. That’s why lately I’ve been looking at dividend stocks and why I’ve been slowly accumulating shares in blue chip companies that consistently pay out dividends. You may remember the Dividend Aristocrats, companies that have increased their dividends each year for 25 consecutive years, and Dividend Champions, companies that have maintained or increased their dividends each year for 50 consecutive years, posts. Those two were written out of my interest for finding consistent dividend paying companies. It’s not a definitive list of what to buy but it’s a start.

Stocks are risky. Dividends are not guaranteed. A company like Integrys Energy Group (TEG), a dividend champion, is appealing because they offer a 6% dividend yield but remember they are still publicly traded and there’s no guarantee they will continue making payments.

Favorable tax treatment of dividends. One of the benefits of dividends is that the payments are taxed at long term capital gains rates. Whereas savings interest is taxed at your ordinary Federal income tax rate, dividends get a lower, favorable rate. For 2010, it’s 15% for those in the 25% and higher tax brackets and 0% for those in the lower brackets.

As is the case anytime you invest, and this is still investing even though it’s “safer” than buying penny stocks, you want to use diversification as your friend and always do a ton of research beforehand. You can’t predict the future but you can improve your chances through research and hard work.

Do you have any good ideas how to to tweak a few extra percent out of your savings?

(Photo: iain)

{ 19 comments, please add your thoughts now! }

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19 Responses to “Fixed Income Strategies to Help Boost Savings Interest Rates”

  1. Your readers may want to consider Trust Preferreds (TruPS). Citi just issued one with a yield of 8.5%. These issues are actually stocks that act like bonds. They have a par value of $25 and pay high yields. Ususally they pay interest quarterly. They can be volatile as you will see if you bring up a price chart encompassing the 2007 – 2009 time frame.
    A couple of good things about them. First, they are an inexpensive way for banks to raise capital and as everyone knows there is considerable interest in recapitalizing the banking system. Secondly, many have dividends that are qualified, meaning they have a low tax rate so they are useful for taxable accounts. Finally, many of the banks that issue these are partially owned by the government. Some of the issues are callable. So, bottom line is you have to do a little homework.
    As always, investors should not put more than 2.5% of their investable assets in a single name.

  2. The old rules no longer apply.
    It’s a brave new world out there.

    Newer ideas are needed.


    • billsnider says:

      I don’t agree. Laws of economics don’t change. everything reverts back to the mean. The problem with this statement is that your time horizon is way to short.

      Bill snider

  3. Here is another good source for checking out rewards checking banks.

    I found some with incredible returns, but on some you have to visit one of their physical branches to open (only in one or two states). I guess if you can plan a road trip to be going through there, it could work out…

  4. If you can put up with just a tiny bit of management, the rewards checking is definitely better than a high yield account. I have one that requires 10 transactions / month with the debit card. So, I find little purchases ($1 and under) that I would be making anyway, and put them on that card instead of my usual cash back card. Just in case, I set up a few $1 donations to charities to be automatically debited monthly. Combined, these easily reach my 10 transactions each month. At 4% return, my monthly balance always increases more than what it would in a high yield account, so it’s kind of like I get those other transactions for free!

  5. 4.26% APY from NBRS Financial Bank FDIC insured sounds too good to be true. Is that legit, or a bait and switch to get people in the door?

    Non-leveraged Muni Bond closed end funds are yielding about 4.5% now on average– a tax equivalent yield of over 7%. Preferred stock ETFs like PFF are somewhere around 7% also. REITs are worth a look….. emerging market bonds around 6%.

  6. zapeta says:

    I’ve been using the rewards checking route to boost interest rates. I’m earning 4% for buying things I would buy anyway.

  7. I like the idea of buying municipal bonds, especially if you have a lot of money. You get a decent interest rate and pay no federal or state taxes.

  8. Kami says:

    I am interested in Dividend Stocks. I know you can buy the stocks directly from the company you are interested in. Is that a better route than using Money Paper and places like that?

  9. RJ Weiss says:

    My biggest concern with my short-term savings is flexibility. Therefore, I have it all in a money market account right now, even though interest rates are really low.

    If flexibility wasn’t my #1 priority, I would invest in muni-bonds.

  10. Oh this is interesting. I know little about investing and did not know there was a list like this. Thank you!

  11. jsbrendog says:

    yeah, something has to happen soon, cause inflation is just going hog wild on mah monies.

    • billsnider says:

      What inflation?

      Sounds like you were not around in the 70’s when inflation was running at 12% +, unemployment was over 10% and we had two years of wage and price controls to stem the flow.

      • Chris says:

        Has inflation ever been negative? If not does that mean that inflation is at its mean?

        • When inflation is negative it’s called deflation. Economists are deathly afraid of deflation because it can send consumer spending into a tailspin as people see overall prices fall and wait to get lower prices. Japan went into a deflationary period in the ’90s and hasn’t pulled out yet. The U.S. experienced deflation in the 1930s.
          In fact, some economists argue that Greenspan and Bernanke lowered interest rates to 1% in 2003 because they feared deflation and thereby created the environment for the housing crisis and the ensuing recession.

      • jsbrendog says:

        no sir i was not and it sounds like i should be thankful for that. obv it’s not the worst. I just would like my money to at least be remaining static and not depreciating like my car. oh big dreams. but hey, a 1.4% apy ingdirect is better than the mattress.

  12. billsnider says:

    I live by the 100 minus your age rule. 120% is way to speculative.

    I get my MAXIMUM stock amount and work with it that way. The remainder I work on trying to get the best yield.

  13. eric says:

    Actually I’ve been hearing that the rule of thumb should be changed from 120 to 110. I’m sure people are all for being more “conservative” these days with their investment allocation.

    • zapeta says:

      Interesting. I’m young and willing to take on more risk, so I’ve been going 120-age. As I age, I plan to move towards 100-age. I don’t want to be too exposed to stocks with only a few years to retirement like a lot of people were in this recession.

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