Keep in mind rising rates as banks seek your savings

The Insider

Your Money

September 26, 2004|By BILL BARNHART

YOU WON'T GET a toaster, but you might get a free lunch.

Banks and savings and loan associations, which many years ago gave away small appliances to attract retail deposits, are promoting savings again.

Savers who rediscover banks and thrifts stand to win the trifecta: competitive interest rates at traditional banks and thrifts and at online banks; an opportunity to capture higher rates as they occur; and government insurance of their accounts up to $100,000 through the FDIC.

"Unlike the rest of the investment world, you don't have to take additional risk in order to earn additional return by finding higher-yielding CDs," said Greg McBride, senior financial analyst at, which tracks savings account yields.

"As long as you're within the bounds of FDIC insurance, it amounts to a risk-free return," he said.

Banks need to rebuild their core deposits. Fed data show that so-called small deposits (accounts less than $100,000) at banks and thrifts peaked at $1.05 trillion in January 2001, as investors fled the stock market.

But declining interest rates and last year's stock market rebound dissipated deposits, to $792 billion in August.

Today, with a flat-line stock market and rising rates, banks are trolling for retail deposits.

Consumers learned the nuances of interest rates as they acquired and refinanced mortgages during the four-year decline in rates. Now, you need to study the flip side - maximizing your cash as rates rise.

"All of us are chasing core deposits," said David Rudis, senior executive vice president at Chicago's LaSalle Bank. "The marketplace has become much more retail-like; the consumer is shopping much more than they ever have before."

Make sure you have no more than $100,000 in accounts attributed to you as the owner. With $50,000 in a checking account and $75,000 in a CD, you have exceeded the insured limit by $25,000.

But you may have several accounts of up to $100,000 each, under different "owners" at a given institution: you, your spouse, a joint account, a self-directed individual retirement account or a revocable trust.

Banks and S&Ls are promoting CDs with automatic adjustments to reflect higher market interest rates or that give you a "step-up" option. But you might get a less-competitive initial rate in return for the step-up feature. The step-up may require an additional deposit or extending the CD's term.

In shopping for the best rates, make sure you understand the terms of the account. Usually, the longer you lock up your money, the higher rates you will receive. Also, higher rates typically are awarded to bigger accounts (remembering the crucial $100,000 limit).

Small banks may beat big banks in the rate game. Be aware that promotional rates and other come-ons may be fleeting. Playing the hot-money game is probably unrewarding.

Don't forget money market mutual funds, which generally are uninsured cash alternatives sold by investment firms.

Peter Crane, editor of iMoneyNet, which tracks money market funds, said money fund yields trail comparable bank and thrift account yields but are likely to take the lead next year, if the trend of higher rates persists.

"Banks have a habit of saying that their rates are going to float and then taking their sweet time in hiking them," he said.

Bill Barnhart is a columnist for the Chicago Tribune, a Tribune Publishing newspaper.

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