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Fixed Income Strategies to Help Boost Savings Interest Rates

If you take the 120 minus your age investment allocation rule [3] 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 [4]. 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 [5] 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, DepositAccounts.com lists the top reward checking account rate is 4.26% APY from NBRS Financial Bank [6] 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 [7] 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 [8], companies that have increased their dividends each year for 25 consecutive years, and Dividend Champions [9], 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 [10]), 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 [11], 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 [12])