| Welcome to Schwab | Investment Products | Research & Strategies | Advice & Retirement | Active Trading | Banking & Lending |
|
| Welcome to Schwab | Investment Products | Research & Strategies | Advice & Retirement | Active Trading | Banking & Lending |
|
 Call us at 866-232-9890  Send us an email |
|
Cash Q&A: We Answer Your Questions by Rob Williams, Director of Income Planning, Schwab Center for Financial Research Updated September 30, 2009 Key points
Click here for important disclosures On cash investments:
One-year jumbo CDs, like regular CDs issued by FDIC-insured banks, are insured by the Federal Deposit Insurance Corporation (FDIC) and carry the full support of the federal government. Right now, that's about as secure a guarantee as you can get. However, jumbo CDs are issued in large denominations, so insurance won't cover the full amount if you exceed the FDIC limit. If you need to invest more than $250,000 in a CD maturing before December 31, 2013, or $100,000 for maturities thereafter, choose several jumbo CDs from a number of different FDIC-insured banks. Also, be aware that a $100,000 jumbo CD maturing after December 31, 2013, may not carry insurance on the interest payments over-and-above the initial $100,000 principal investment. 1 Return to top Are CDs for amounts less than $250,000 covered with the same level of protection from the FDIC as Treasury bonds are from the U.S. government? The FDIC is an independent agency of the federal government, and the guarantee is backed by the FDIC insurance fund, which is similarly backed by the full faith and credit of the U.S. government. This is the same guarantee granted to payment of interest and principal at maturity on Treasury bonds. So, the protection provided for your CD or bank balance (up to the FDIC limit) would be equally secure. For more information on how the FDIC provides this protection, please see the article in the sidebar at right. However, any amount invested above the FDIC limit would be protected only by the credit quality of the bank itself, and the FDIC does not protect any change in value if you choose to sell. Return to top Is there a list of CDs and their interest rates available? Schwab clients can shop for currently available FDIC-insured CDs at Schwab CD OneSource (see sidebar) or speak with a Schwab fixed income specialist at 866-232-9890. Return to top Which secure, fixed-income investments would you recommend for retirees who cannot afford to lose any more of their retirement savings? If you're only looking to ensure that you won't lose principal, the safest investments are FDIC-insured checking or savings accounts or a bank CD. All three, assuming you're under the FDIC's coverage limits, guarantee that you won’t lose principal. Money market funds are regulated by the SEC and seek to maintain a stable share price of $1. But, the value is not federally guaranteed. Still, they are considered very safe, because the firms running the fund have a very strong incentive to maintain the $1 share value. They're also monitored by the SEC, which enforces this commitment. Still, the returns recently have been quite low. Consider individual government bonds (like Treasury bills, Treasury notes, Treasury Inflation-Protected Securities or GNMA bonds) if you plan to hold to maturity. They all enjoy the full faith and credit support of the federal government. Keep in mind, though, if you don't hold until maturity, the value of longer-term Treasury bonds could drop if interest rates rise. If you do hold to maturity, however, you'll be guaranteed back the full principal amount. For a little more risk for the potential for slightly higher returns, consider a short- to intermediate-term government bond mutual fund (holding Treasuries and other guaranteed investments), ultra-short or short-term bond fund, or a short-term municipal bond fund (in taxable accounts). Return to top Where's the best place to put my cash if I'm looking for safety, high return and liquidity? Unfortunately, it's tough to find safety, liquidity and high return all in one investment these days. Safety and liquidity alone are fairly straight-forward—Treasury bills or money market funds come to mind. But yields on both are quite low, approaching zero for the shortest-term Treasury bills. For ample liquidity and competitive returns, you might look to an interest-bearing checking or savings account. They're FDIC-insured up to certain limits, and the rates for many recently have been higher than the very low rates offered from T-bills and most money market funds. You could also turn to a ladder of three-month to one-year FDIC-insured CDs. However, you'll lose a little bit in liquidity if you need to sell, and your cash access may not be immediate—not the best choice for daily spending needs. Shop for the best rate, and consider whether you're being adequately compensated for the lower liquidity compared to an interest-bearing checking or savings account. Return to top How do I invest cash at this time? It's hard to beat many interest-bearing checking or savings accounts right now, which generate competitive returns and provide immediate liquidity. Checking accounts also provide check-writing privileges. For potentially (though not always) higher returns with less liquidity, consider CDs or a purchased money market fund. For CDs, the price if you need to sell or cash-out before maturity depends on market conditions or pre-determined penalties. For purchased money market funds, you’d need to wait until the next day for access to your funds if you sell before 4 p.m. ET on the day before; and returns will vary. Others investments, like ultra-short or short-term bond funds, may generate slightly higher returns, but they also carry the risk of a drop in share value. They shouldn't be substituted for cash or other cash investments for ultimate safety of principal. You won't have immediate access to your cash, but like a purchased money market fund, you can sell shares to have access to your funds the next business day. Return to top Should I consider putting cash into a money market fund or a CD at this particular time? It depends, partly, on when you need the cash, as well as available rates. CDs are generally meant to be held to maturity. You should be able to sell before maturity if you need to, but the price depends on market conditions (or pre-determined penalties), and there's no guarantee you'll receive your original investment in full. Purchased money market funds commit to maintaining a $1 per share value, so you can be reasonably certain you'd be able to access your funds the next business day, after you choose to sell, at a definite price. But yields on purchased money-market funds have been quite low. For higher returns and liquidity, consider the yields offered on interest-bearing checking or savings accounts as well. If you don't think you'll need the cash immediately, longer-term CDs may also offer competitive returns for the trade off in lower liquidity if you need to sell. Note also that CDs offer a fixed return over a fixed period of time; money market funds, interest-bearing checking accounts, and savings accounts have rates that change depending on market conditions. If interest rates rise, the promised rate on a CD may be less competitive. If rates drop, the promised rate could end up being a good deal compared to the alternatives. Right now, interest rates are near record lows. Return to top Where should I keep my emergency fund? If you’ve saved between three and six months' worth of living expenses, you've gone a long way toward cushioning yourself against unforeseen emergencies. But where should you put your funds? While tempting, under your mattress is probably not the best option. We recommend you invest emergency funds in relatively liquid cash investments that you won't have to worry about and that aren't likely to decrease in value. Some options to consider:
Important Disclosures 1. The temporary increase of FDIC insurance coverage to $250,000 for all insurable capacities has been extended through December 31, 2013. If not further extended, FDIC coverage will revert to $100,000 on January 1, 2014 for all insurable capacities except IRAs and certain other self-directed retirement accounts and plans. Unless the increased coverage is extended, deposit insurance coverage for CDs with a maturity date after December 31, 2013 will revert to the prior FDIC coverage on January 1, 2014, regardless of when you purchased the CD. You should not rely on a possible extension of this increased coverage in purchasing CDs. Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing. An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. Please note that bank deposits are FDIC insured up to $250,000 while nonbank independent products have no such guarantees. Certificates of deposit are offered through Charles Schwab & Co., Inc. CDs from Schwab CD OneSource are issued by other FDIC-insured institutions, and are subject to change and system access. Unlike mutual funds, certificates of deposit offer a fixed rate of return and are FDIC-insured. There may be costs associated with early redemption and possible market value adjustment. The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized advice. The strategies mentioned here may not be suitable for everyone. Each investor needs to review their portfolio strategy carefully for his or her own particular situation before making any decisions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Please be sure to research this information further before making any decisions as the rules and restrictions described are subject to change in reaction to shifting market conditions. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. Brokerage products offered by Charles Schwab & Co., Inc., are not FDIC insured, are not deposits or guaranteed obligations of a bank, and are subject to investment risk. (0909-10465) Return to Top |
Learn more about FDIC protection
Find CDs at Schwab
Schwab answers your questions on ...
|
Facebook
LinkedIn
Twitter
Digg