Consumer Deposit Interest Rate Information
With cash management strategy, your goal is to preserve liquidity to meet day-to-day expenses, while also earning interest on cash that is set aside for intermediate-term goals. As part of your financial plan, it is important that you learn to evaluate consumer deposit interest rate information. From there, you can build a complete portfolio that matches up well with your investment objectives.
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FDIC Insurance
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Bank deposits are separate and distinct from investment products due to the presence of FDIC insurance. As of 2010, the FDIC guarantees $250,000 worth of deposits per customer, per bank. As a large saver, you will patronize several different banks to insure the entire amount. Because of the safety of your bank deposits, you must be willing to accept relatively low returns and interest rates.
Banking Products
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On banking products, interest rates increase when you agree to make larger deposits and to lock up money for longer periods of time. For example, you can expect to earn a higher interest rate on a five-year Certificate of Deposit, than you would for a one-month CD. Money market deposit accounts also offer higher interest rates relative to other banking products. Money market accounts, however, generally limit the number of monthly withdrawals that you may execute. Alternatively, regular checking and savings accounts allow you to make on demand withdrawals, but make small interest payments, if any.
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The Federal Reserve
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The Federal Reserve Board influences the interest rate environment to manage the economy. When thinking on how the Fed works, you must remember that deposits are actually liabilities for banks. In recession, you can expect to earn low interest rates on bank deposits. At that point, the Fed is working to lower borrowing costs. Lower rates encourage people and institutions to borrow, spend and invest money. When the economy resumes growth, the Fed targets higher interest rates to slow down the economy and protect it against inflation.
Financial Risks
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Banking products are subject to inflation and interest rate risks. Inflation relates to increasing prices for goods and services, and lost purchasing power on cash. The Bureau of Labor Statistics pegs the domestic inflation rate at 3 percent per year. Accounting for inflation, you are likely to be losing money on checking and savings accounts at all times.
Adverse shifts in interest rates affect your bottom line. On a money market deposit account, you would collect smaller interest payments when rates fall. Alternatively, your 5-year CD becomes less attractive as interest rates rise. At that point, you would find yourself locked into a long-term banking product that makes relatively minimal interest payments.
Diversification Strategy
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Diversification helps you manage financial risks and invest for growth. Your cash management portfolio may include a money market deposit account and two-year CD. Your money market account performance automatically tracks increases in prevailing interest rates. Meanwhile, your CD allows you to lock in a good rate if interest rates were to actually fall. Be sure to combine bank deposits with stocks and bonds, which are ideal investments for long-term growth.
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