Question: I have $30,000 and want to know where best to put it. I thought I should put it all toward my current mortgage, which is at 7 percent, and then ask for a refinance. (I have asked and been denied FIVE times.) But, my best friend says I should not do this. I had put all of it into a CD and found that it was only making .4 percent. I was in the bank office with my three boys and thought the banker said 4 percent. I immediately retracted my CD -- luckily, with no penalty!
My head is spinning with all of this. Ultimately, I want to put it away for my three boys' futures. I want it to make something, however slowly, without risk. But, 0.4 percent? Is that really the best I can do? Thank you for your time and knowledge. I listen every Sunday!!! Joanna, Hammond, IN
Answer: Thanks for listening. I certainty understand your frustration. The yields on safe savings are practically zero at 0.4 percent. Yet, at the moment, I think cash is king. Here's my reasoning. Let me know what you think.
We're living through another bout of heightened uncertainty. Europe's never-ending crisis with the sovereign debt of the Eurozone's periphery nations threatens the health of major banks in the European Union. The fear of another global recession and global credit crunch is strong, with the troubled economies of Spain and Greece at the epicenter of the crisis. China, India, and other major emerging market economies are slowing down. The U.S. economy is losing momentum, too, even as Washington seems more politically paralyzed than usual (if that's possible) in an election year.
Of course, none of this means that we will fall into another global recession. We could steer clear of economic disaster. The U.S. economy is still growing. The European Union may embrace a growth agenda. No, it's the nature of heightened uncertainty that concerns me, although the downside risks are increasingly apparent.
Cash is a relatively cheap, easily understood and underappreciated hedge against economic and financial trouble. With cash, the investor simply reduces the amount of money at risk to a financial cataclysm. The price of safety is a low return. I would keep the money in federally insured accounts at a bank or credit union, which means you'll earn almost nothing on the savings. I wouldn't lock up the money for a long period of time -- say, 2 years -- to earn a higher rate. Instead, I'd keep it short-term for now.
Thing is, your money will be safe while you decide the best use of it. A lot depends on how secure your household income is. The more insecure your household income, the more you want to build up safe savings -- and vice versa.
I would go to your bank and find out, if you put some to all of the money toward paying down principal, would you be able to refinance? And at what rate? Despite the lure of current low mortgage rates, I would be wary of draining your savings to refinance. But I would want to find out if it's even a practical option. It's frustrating that people can't refinance their homes in the current environment, since it would free up additional household cash flow. Anyway, you want to learn what your options are, since 7 percent is a high rate.
You could also focus on growing the savings, which I know is much easier said than done. However, over time, a substantial margin of financial safety will give you greater choices over the best way to invest the money with your sons in mind.