Because we currently live in perilous financial times, many of today's experts suggest using your bank with caution and substituting Treasury-backed securities backed by the federal government (TBS) as an alternative—usually in the form of treasury short-term money market funds containing only short-term federal notes, which are known for their liquidity and added safety.
Secrets Your Bank Won't Tell You
Most banks only have federal insurance on accounts totaling $250,000 or less, and this threshold may revert back to a lower number in the near future. Did you know that:
- Most banks will not pay interest on business checking accounts and also charge a fee for writing checks.
- A bank holiday may limit your access to your bank account, even it is under the federally insured threshold.
- Bank bonds and debentures are also risky at this time.
In spite of this, most people will need to keep a checking account in a local bank.
A Look at Treasury-Backed Securities (TBS)
Since Treasury-backed securities are the safest and most liquid assets available today, you should hold a significant portion of your liquid assets in these vehicles. A few quick pointers:
- To purchase Treasury-backed securities, you can go to a Treasury money market fund (STMF) or buy the bills or bonds directly at TreasuryDirect. Some banks may have a Treasury purchase program. It is clear that the U.S. government will not let these fail.
- You will not need separate checking and savings account if you use a Treasury money market fund, since it performs both functions.
- You may get a tax break on your state income tax with a Treasury-backed securities fund.
- You can access to your funds through checks or wires. Wiring instruction to your bank account should be established when the account is set up.
- You can deposit money by check or by wire. (If you are depositing by check, you must write "For deposit only" on the back, along with your signature.)
- Some government money market funds have Fannie Mae and other similar securities; you want only funds that invest primarily in Treasury-backed securities.
- STMF value remains stable and does not change from day to day. What does change are the interest payments you will receive, which today are miniscule. The government is doing everything it can to keep the lid on short-term interest rates. If we have significant inflation, the interest rate paid on treasuries will eventually rise as well.
Why Choose Treasury-backed Securities?
A Treasury money market fund will pay some interest, and in addition, you get the safety of Treasury-backed securities. But you must choose very high quality Treasury-backed securities like American Century Capital Preservation, Dreyfus 100% U.S. Treasury Money Market Fund, Schwab U.S. Treasury Money Fund and/or Vanguard Treasury Money Market Fund. These funds and several others contain only short-term T-bills and have minimal to no exposure to "toxic assets."
Types of Treasury-backed Income Funds
Short-term money market treasuries are initially safer than longer-term bond Treasury-backed funds (LTBs) for the following reasons.
- Treasury money market bills that are held in the best STMFs usually have less than 90 days until they reach maturity and have minimal to no price volatility. On the other hand, they pay minimal income now.
- Federally secured bond funds are from 90 days to many years in duration.
- There are short-term, intermediate-term and long-term bond funds; the longer the duration of the funds, the higher their price volatility.
- Interest rates vary and are usually higher if you are willing to take more risk in the price of the bonds as expressed as their current value.
- Long-term Treasury bonds are safe in terms of their being federally insured, but are much more volatile and if interest rates escalate, the value of the bonds will drop.
- Some Treasury-backed bond funds (e.g., LTBs) also contain toxic assets, and thus are not right for most seniors. Most professionals advise against holding a high percentage of your assets in long-term Treasury bonds of any kind, at this time, because if you own them and inflation hits, the value of the bond portfolio could tank—but interest rates will escalate at the same time.
If you wish to increase your current income and are willing to suffer the volatility, many suggest going with only short-term to intermediate-term Treasury bonds to eliminate the volatility that many see in our financial future. Check out the safety of your bank and insurance company online at www.TheStreet.com.
Editor's Note: This article is based on the author's own opinion as a personal investor, and does not replace the advice of an investment professional.
Source: Weiss, Martin D., PhD and Larson, Michael. The Safe Money Banking Survival Guide. February 2009