Brett Arends from the Wall Street Journal had an excellent article recently on how to manage your finances in these troubling times. I have already taken one of his suggestions and moved my cash reserves* into the Vanguard Tax-Exempt Money Market fund (VMSXX) that is currently yielding 5.84% – far above money market averages and with an industry bottom 0.17% management expense ratio. If you’re in the 25% tax bracket, the return on this fund is equivalent of a taxable 7.7% APY! Why are tax free money market funds providing such high yields? Pamela Wisehaupt Tynan, who oversees Vanguard’s municipal money market funds says “These unusually high yields are simply a function of how the money market arena is reacting to events in the credit markets right now. These yields are not coming from lower-quality securities, nor are they related to problems with the creditworthiness of municipalities.”
* Note: For risk management and diversification I have still got my 6 months worth of emergency funds in an FDIC insured ING Direct account. See this article for more.
Other tips worth considering to efficiently manage your funds in current market and economic conditions:
1. Inflation-protected Treasury bonds are still paying about 2% after inflation. Not a bad long term return in an inflationary environment. These are about the safest investments you can own, because they are paid by the federal government and the interest rate adjusts with inflation. This makes it a good investment for those close to retirement on in retirement to ensure a guaranteed income stream and avoid being subject to the vagaries of the market. Check Bankrate.com or Morningstar.com to compare the offerings and rates on all types of funds. Make sure you look at the expense ratios (management fees) in addition to the yields and five year rates of return.
2. Think globally. This entire financial meltdown has hit both our nation’s economy and our credibility. It is very likely it will accelerate the shift in power and relative wealth to other countries. Meanwhile our stock market still trades at its historic premium to others. Some foreign stock markets are now much better value than Wall Street. The best way to play this is to invest in an international fund. Go with one of the large and well diversified Vanguard or Fidelity international funds to get your global exposure. These fund management companies charges the lowest fees, so you get the maximum bang for your buck.
3. Don’t panic. This is not the time to be bailing out of the market. It’s already fallen a long way and you risk selling at the bottom of the market by exiting now. But it’s never the wrong time to rebalance your portfolio if needed. That may include holding some cash and bonds as well as equity mutual funds. I just rebalanced per the introductory paragraph by moving my cash reserves to the Vanguard Tax-Exempt Money Market fund and am now reviewing my stock portfolio.
4.Cash, cash, cash. Most families should have at least three months’ living expenses in ready cash. As I wrote previously, I think you should be looking to keep 6 to 12 months cash on hand given ailing macro-economic conditions. Split your funds between a high interest account (for emergency funds) or a money market fund (for the rest of your cash) as discussed above.
5. When you start slashing your household expenses, don’t just go for the big ticket items. Take a hard look at those recurring bills as well and annualize the costs to get a more realistic picture. A $60 a month cell phone plan you hardly use isn’t really costing you $60. It’s costing you $720 a year. Consider using online telephony providers which can provide significant savings on your local and long distance calls.
6. If you can – and that’s a big if in this environment– take another look at refinancing your mortgage. Long-term rates just fell again. You can get conforming 30-year fixed loans for less than 6% interest (provided you have good credit). Not only can you save money by cutting your interest rates: This can also be a useful source of extra cash. If you wait till you really need it, you may not be able to get it. Also consider increasing the frequency of your mortgage repayments if you have cash on the sidelines. Increasing the number or frequency of your payments, even marginally, can greatly reduce the amount of interest you pay and thereby, reduce the number of years you pay toward the mortgage – by about seven years, if done diligently.