Savings Accounts and CDs

When I look at the stock market today, I feel as if many of the investors around me are willfully deluding themselves. The market’s advance is due to some extent to Federal Reserve support, not basic economic improvement. Stock investors should be wary.

It feels fantastic to reach new highs. I am glad that is happening and even expect the rally to continue a bit further, but this makes it no less an illusion. A reckoning over the country’s high levels of borrowing is coming. Ignorance is bliss, but only until reality catches up with you.

Forecasts of economic catastrophe crop up all the time, and especially lately. Don’t buy into them. While we do confront real problems, like government overspending and potential dollar debasement, the solution isn’t to exit the markets out of fear. Remember that a smart, diversified portfolio triumphs in the long run.

With a sufficiently long time horizon, you can reasonably expect a 7% to 8% return on investment from stocks. The problem is no one knows what your return is in the year that you need to sell the investments.

The first thing that I ask clients is how long from now they need their money and how much risk they are willing to take. Over a 20-year period, a healthy return is easy to achieve. For example, the Dow Jones Industrial Average returned 8.85% per year on average from 1991 to 2011.

You can save for retirement and chip away at debt. But you neglect to build a cash emergency fund at your peril. While cash doesn’t yield returns, it provides you with a crucial safety net.

Many investors, even very savvy ones, are asset rich and cash poor. To them, compared with paying down a mortgage at 4% or earning 10% in a mutual fund, having cash sit in the bank just isn’t an attractive idea.

Comparing interest rates for certificates of deposit? You will see the terms APY (Annual Percentage Yield) and APR (Annual Percentage Rate) in the brochure. What does each mean and how are they different?

APR is the account’s headline number. For example, if you invest $1,000 in a one-year CD that pays 5%, that means the CD’s APR is 5%. So it seems as if the account makes 5% ($50) for the year for a total of $1,050. But this might not actually be the case.

It’s easy to save for retirement if you make it the first bill you pay. You can do this through fixed direct deposit, an employer retirement program or by getting on an automatic pay plan. It doesn’t matter if it’s only a small amount. What does matter is that you pay yourself first.

First, one of the easiest things you can do is take a portion of your paycheck and stick it right in the bank the day you get paid. If your employer allows direct deposit, take advantage of it.

The Federal Reserve gorged on bonds for years. In the latest iteration of quantitative easing, the Fed is buying $40 billion in mortgage-backed securities every month to keep interest rates down. But investors should know that the days of this Fed stimulus likely are numbered.

Now, according to minutes from the last meeting of the Federal Open Market Committee, some Fed board members finally realize that this risky program isn’t working.

When 2012 began, you probably vowed to get out of debt, get your retirement savings on track and lose a few pounds, right? It isn’t easy to stay on track with money. Here are a few simple steps and handy online tools that you can use to improve your finances this year.

Step 1: Start by getting out of debt.

The Federal Deposit Insurance Corp.’s unlimited guarantee on deposits has expired. This means you need to take action and look at shifting your bank account money.

If you have more than $250,000 in one bank account, this policy change could distort financial markets and even affect you directly. To be on the safe side, divide your deposit money into separate accounts.  

You don’t necessarily need to go to another bank. Within one institution, you could have some money in a single account (owned by one person) and other money in a joint account (owned by two).

We are moving toward an age when most financial transactions happen online. It’s more convenient, but there’s danger involved. Identity thieves are ready to pounce if they can find your passwords.

If your online banking password is “123456,” for instance, you have a problem.