Wednesday, July 16, 2014

Where to Invest for Yield?

A lot of people ask where to invest today to get a decent yield.  Regular savings accounts pay 0.01%, money market funds have a similar rate, high interest savings accounts pay 0.75 to 0.90%, intermediate bond funds pay about 3%, stock funds have dividend yields of 1 to 3%.

Clearly, there is no easy place to find low risk high percentage payouts in today's markets. So what to do if you have excess cash?  My advice is twofold.

1. You should look for places where you can personally get a return.  The market may not offer an easy place to get yield, but your personal situation may provide some opportunities.  Pay down your credit card and auto debt if possible, these are probably costing you 5 to 15%.  Pay down your mortgage.  Even at 4% interest, this is a better return than a savings account.  Pay down student loan debt.  If you are debt-free, make sure you max out your RRSP/IRA/401K contributions, where the government will give you a large tax benefit which is somewhat equivalent to a return on investment.  If you do not own a home and live in a place where the housing market is still undervalued (most of the USA), you should consider buying a house.  Housing will generally appreciate at the inflation rate or higher and part of your monthly mortgage payment can be considered savings. However, buying a first home is a big decision so think carefully and do or get a personal financial plan to ensure this makes sense.

2. My second point is not to worry so much about low yield.  US inflation is running at about 1.5 to 2%.  You are not losing a lot of purchasing power if you put your money in a savings account at 0.90%.  If inflation tops 3 or 4% and risk-free yields stay this low, you should start to worry.

A last piece of advice.  If you have excess cash, are debt-free, maxed out all your retirement savings, you should consider using the money.  If the money is not going to earn you much, and you have always wanted to do or buy something, maybe now is the time?  If taking an exotic cruise or building a kit-car Shelby Cobra was always at the top of your bucket list, maybe now is the time to cross it off the list?  Just a thought...

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