5 things to know about ‘chicken money’
Everyone has heard about the bulls and the bears. But what about the “chickens”? What do you do with money that you don’t want to lose, or can’t afford to lose? You stash it in a safe place, like insured deposits in a bank.
But these days, the Fed has put a lid on interest rates, so your chicken money doesn’t earn any interest. According to Bankrate.com, the average yield on a one-year CD gives you only 0.28 percent, and money market deposit accounts that give you liquidity yield far less.
Low rates are a great way to help the government finance its growing deficits. But they sure make it tough for savers and retirees who wanted to live on the interest from their savings. Here are five things you should know about “chicken money.”
1. Safety first
The safest short-term investment in the world is U.S. Treasury bills, where rates are set at multibillion-dollar weekly auctions. In times of fear, global money rushes to buy T-bills, pushing the auction yields down. Any short-term investment that yields more than T-bill rates involves more risk.
2. Stay short-term
Ultra-safe investments are limited to short-term FDIC-insured money market deposit accounts or bank CDs. You can buy U.S. Treasury bills directly from the government at those weekly auctions in minimum amounts of $100. For information, go to TreasuryDirect.gov. Money market mutual funds also offer shortterm safety and liquidity. But choose one that buys only short-term U.S. Treasury securities.
3. Don’t stretch for yield
If you tie up your money for a longer term, you’ll get a higher yield — but at some extra risk. If you buy a five-year, FDIC-insured CD (currently yielding 0.87 percent, the national average reported by Bankrate.com), you could be stuck in a low yielding account if rates suddenly rise. Or you would pay a penalty to break out of that CD early to invest in something else.
4. Understand the risks you are taking to get higher yields
The stock market (S&P 500 stock index) currently has a dividend yield of 1.87 percent, but many companies pay more. (Check out Chuck Carlson’s website BigSafeDividends.com.) But the risk is that a company could cut its dividend, or that the stock price could fall for some other reason.
5. Beware of bonds
Bonds have higher yields than Treasuries, but typically that reflects the risk that the company may not be able to pay the interest or repay the principal in the future. You also risk losing money if you sell a low-yielding bond before maturity. Other investments, such as annuities, may offer higher yield, but beware of penalties for taking your money out early. That’s called liquidity risk.
It’s not easy to hold on to cash or lowyielding short-term chicken money investments when it means you have to dig into principal to maintain your lifestyle. But before reaching for yield, consider the impact on your life if you take more risk and lose some of your principal.
Remember the motto of the chicken money investor: “I’m not so concerned about the return on my money, as I am about the return of my money!” That’s the Savage Truth.
They sure make it tough for savers and retirees who wanted to live on the interest from their savings.