By Wayne Taylor, Executive Director Louisiana Baptist Foundation
I recently opened a checking account for my son, and we looked at the interest rates being paid by the bank.
They offered 0.01 percent on checking accounts and .25 percent on a one-year CD.
I explained to my son that for many years the common passbook savings rate was 5.25 percent, and rates were higher if your money was locked in for a period of time. I explained to him that people save money all their lives in order to retire and live off the interest or earnings from their investments.
Today due to a poor economy and low interest rates, some retired folks are beginning to “eat” their principle and are hoping they don’t outlive their money.
In this low interest rate environment, everyone is searching for higher interest rates, but desperation and greed can cause people to be fooled by a bad deal or unscrupulous people.
I have seen advertisements showing rates as high as 7 percent, 8 percent, and 11 percent.
My fear is that individuals who have been hurt by low interest rates will be hurt more by investing with companies offering interest rates that are “too high” in this low interest rate environment.
To determine if a rate is too high, begin with what safe rates are. The following rates are from the Wall Street Journal website as of 11/10/11:
US Treasury rates for 6 month 0.04 percent, 1 year 0.12 percent, 2 year 0.23 percent and 5 year 0.91 percent.
The national average CD for 6 months 0.22 percent, 1 year 0.33 percent, 2 year 0.53 percent and 5 year 1.21 percent.
Knowing what common safe rates are will help you evaluate the risk of other rates.
US Treasury rates are considered the safest (because the Treasury owns the approved printing press for money).
Savings or investments other than US Treasuries pay higher rates because they have more risk.
The higher the interest rate the higher the risk, until the point where the risk outweighs the rate. Remember the old truth “If it’s too good to be true – it is (too good to be true.)”
Be on guard for companies raising rates during a time when other rates are going down; it could be a red warning flag that the company is facing grave difficulty, and you might not get your money back.
For example, an article in the Nov. 9, 2011, Wall Street Journal points out that when the Italian Government 10- year bond yield went over 7 percent, it indicated the bond’s questionable future.
Also be on guard for the word “guaranteed.” If you see this word, ask the question “Who is guaranteeing the investment?”
Don’t assume the guarantee means the U.S. Government. If the savings or investment is not directly with the U.S. Treasury, an agency of the U.S. government or a FDIC-insured bank, the guarantee is not backed by the U.S. government.
In most cases the guarantee is “backed” by the company itself. No insurance products – such as annuities or life insurance – are guaranteed by the government.
In my 16 years at the Louisiana Baptist Foundation, I’ve seen some high interest “investments“ go bad: the Arizona Baptist Foundation promissory notes in the 1990s; medical accounts receivable promissory notes in the Northeast Louisiana area; an option strategy promissory note in the Northwest Louisiana area; and we all know about Madoff in 2010.
Back in the mid ’80s, an insurance company named Private Investors in the Central Louisiana area went under after promising high rates to unsuspecting customers. Another high interest investment involved timber in north-central Louisiana.
Each of these investments involved “credible” people selling what they “believed” was a solid investment, but they did not understand the simple truth that I’m trying to communicate in this article.
If the rate is too high, it is for a reason that will probably result in a collapse.
Currently, there is nowhere a company can earn more than 4 or 5 percent in order to pay an investor 2 or 3 percent with any relative safety.
Remember, a company must earn more than they pay, or they will fail, their “guarantee” will fail, and investors will not get their money back.
While the information above has been aimed at individuals, churches should also be good stewards of the money God has entrusted to their care. A church should try to earn a competitive but safe interest rate.
The Louisiana Baptist Foundation offers savings options to churches for their resources, such as the Short Term Fund and a new Term Deposit Account. These accounts are not FDIC insured because the Foundation is not a bank, but “safe” is due to the types of bonds purchased as well as the investment and management policies.