PERSONAL FINANCE : FIRST STEPS : BRIDGING THE GAP : High Yields Among the Paths to Your Financial Fortress
No Pain, No Gain
Higher return usually means higher risk. As these bridges show, if you go for a yield of only 4%, it will take you 18 years to double your money and reach your financial fortress. But at least it’s a safe journey. Trying to earn 15% on your money might get you across fast--in only 4.8 years--but you also risk falling off.
As consumers abandon stocks in favor of conventional federally insured savings accounts, more people are wondering how to earn the highest interest on certificates of deposit and bank money market accounts.
The search can be worthwhile. Statistics show that federally insured deposits in an institution paying high yields can earn about an extra $100 a year in interest for every $10,000, compared to a national average for yield.
For instance, Atlantic Bank & Trust in Boston offers a six-month CD with an effective annual yield of 7.93%, far higher than the national average. The same rate is offered by Benjamin Franklin Savings in Houston. And a one-year CD at Home Savings in Kansas City has an annual yield of 8.40%, also much higher.
But locating that high-paying bank or savings and loan association can be tedious if you do it yourself. There are nearly 17,000 institutions nationwide insured by the Federal Deposit Insurance Corp. or the Federal Savings and Loan Insurance Corp., and their interest rates are all over the ballpark.
Brokerage houses often have resources for selecting high-paying institutions for customer CDs, but there will be a commission involved. Lists of the highest-paying insured institutions are published in some newspapers, such as the Wall Street Journal on Fridays, and in magazines, such as Money.
Perhaps the best way to do it yourself is through three newsletters designed for the consumer looking for someplace safer than the stock market. Coincidentally, all three are located within an hour’s drive of each other in Florida.
They all list only institutions insured by either FDIC or FSLIC, which means that so long as you keep your account below $100,000, your money is 100% safe. And they all provide an assessment of the relative health of institutions listed, a telephone number for each institution and minimum deposits for each type of account.
“No one has ever lost a penny up to the $100,000 limit in a federally insured outfit,” says Robert K. Heady, publisher of 100 Highest Yields, a weekly newsletter in North Palm Beach, Fla., that tracks highest-yielding CDs and money market accounts. “However, irrespective of the safety net, we have discovered that many consumers need the psychological comfort of knowing that their money is in a financially stable institution.”
As a result, Heady recently began using a star rating system for the institutions on his weekly list. The stars are awarded by Veribanc of Woburn, Mass., one of several firms that analyze financial conditions of federally insured institutions and sell the results to the public.
In addition to 100 Highest Yields (Box 088888, North Palm Beach, Fla. 33408), the other newsletters are Income & Safety (3471 N. Federal Highway, Ft. Lauderdale, Fla. 33306) and Tiered Rate Watch (Box 145510, Coral Gables, Fla. 33114).
Subscriptions to each run about $100 a year and the services they offer vary somewhat.
For the past three years, the lists have been dominated by Texas savings and loans, which are paying top dollar to attract funds to the state’s ravaged financial system. Many of these institutions are weak or even insolvent thrifts, referred to as “brain dead” in the industry. But the FSLIC guarantee is still intact.
Heady said he has noticed an interesting trend recently. Institutions in the Northeast are upping their interest rates to attract funds to finance the economic boom in the region. These institutions tend to be healthier, which may bring some additional comfort to consumers, he said.
On June 1, the 20 top-paying institutions for one-year CDs, according to Heady, included 11 institutions from New England or the Washington-Maryland-Virginia area, and they were generally rated stronger by Veribanc than institutions in Texas.
When high-paying institutions are out of state, you will need to take precautions in dealing with them. First, call or write the institution and ask to speak to the person in charge of consumer deposit accounts. Explain how much you expect to invest and for how long, and then ask some questions.
Among the things you need to know, according to a pamphlet published by Heady, are the exact rate and yield on the account you are interested in, when interest starts, when you can get your money, and withdrawal penalties in force. The last thing you do, if satisfied, is ask for an account form.
When you return your account form, be sure to include a comprehensive cover letter that includes your name, address, phone number and Social Security number. You should also specify the account you want and the maturity date, as well as the yield you were provided over the telephone. Make copies of all correspondence.
The institution should send you a deposit slip by return mail, but you should also contact the institution a few days after sending your letter to make sure everything is all right.
For those who put their funds in institutions regarded as weak, there are a couple of tips that add a layer of protection.
Paul Simmonds, research director at the Institute for Econometric Research in Ft. Lauderdale, which publishes Income & Safety, suggests limiting each account to $90,000 or $95,000. If the institution is shut down, accrued interest will not push your account over the $100,000 insurance limit and cost you money.
Simmonds also says people who travel for long periods should check regularly with their institution to make sure it has not been closed. In some cases, interest stops accruing when the federal regulators shut down a thrift or bank and you don’t want your money sitting idle while you are on a three-month trip around the world.
By carefully following the regulations, separate accounts can be created at a single institution that provide insurance well over $100,000. The example often used in newsletters and other publications shows how a family of four can insure up to $1.4 million if the accounts are set up properly.
This is perfectly legal, but it has to be done right. When FDIC or FSLIC closes an institution, the examiners reconstruct each account. Those who fail to qualify for insurance have to stand in line with the remainder of uninsured claimants.
“We don’t promote creating multiple accounts simply because these accounts have to be set up properly to enjoy the insurance protection,” says Stephen J. Katsanos, an FDIC spokesman in Washington. “A lot of organizations put out this information and say, ‘Split it this way.’ A lot of people misunderstand the law.”
Katsanos and Pamela Rogash, assistant director of FSLIC’s insurance division, both suggest having multiple account arrangements reviewed carefully at the institution and through the insuring agency.
Send questions or a copy of your arrangement to FDIC, Corporate Communications, 550 17th St. N.W., Washington, D.C. 20429, or to FSLIC, Insurance Division, 1700 G St. N.W., Washington, D.C. 20552.
When it comes to assessing the soundness of a particular bank or savings and loan, publicly available data can be difficult to interpret. Several private firms analyze the numbers and provide assessments for a fee.
Veribanc (Box 2963, Woburn, Mass. 01888) provides a full report for $45 or a partial analysis for $20. Cates Consulting Analysts (40 Broad St., New York, N.Y. 10004) offers reports comparing either banks or thrifts for $50 each and also rates institutions by risk in a report that costs $100.
Kaplan Smith (2 Ravinia Dr., Suite 1200, Atlanta, Ga. 30346) provides a report on any thrift for $100 or a report covering all thrifts in one of the 12 national districts for $125. T.J. Holt & Co. (290 Post Road West, Westport, Conn. 06880) sells a one-page report on any three institutions for $25.
DR, PATRICIA MITCHELL / Los Angeles Times
