Reducing Financial Stress By Lewis J. Walker, CFP(R)

A major bank ran an expensive Super Bowl ad, saying “they want to inspire a movement for people to reduce financial stress.” A worthy objective, for sure!

The bank indicated that they want people to build financial confidence, not necessarily market their services. That’s a soft sell but obviously putting money into the bank’s government guaranteed checking, money market, or CD accounts is a step in the right direction.

Knowing that you have enough liquid savings to meet unexpected needs is comforting. But beyond working capital and emergency funds, the goal of any savings or investment program is to build future purchasing power net of inflation and taxation. That is not easy, especially on “no risk” guaranteed savings.

All Items Inflation is running at a 0.7% annualized rate according to The Wall Street Journal (2/5/16). Core inflation, a measure which excludes transitory or temporary price volatility as in the case of commodities such as food, energy, etc., is clocking in at a 2.1% annualized rate. Obviously, declining energy and commodity prices are suppressing some inflation metrics for the time being. Depending on what you buy, your personal inflation rate could run between one and two percent annually. For example purposes, we will say your personal inflation rate is 1.5% currently.

Then there is taxes. For 2016, federal tax brackets range from 10% to a high of 39.6%. A single filer with taxable income between $37,650 to $91,150 falls into the 25% bracket. For joint filers, taxable income between $75,300 to $151,900 puts you in the 25% bracket. Above that are 28%, 33%, 35%, and 39.6% brackets. Google “2016 tax brackets” to see where you may fall for 2016. Tax planning should start now!

In Georgia the incremental bracket on ordinary income like bank interest is 6%. After the tax man and Mr. Inflation takes a bite out of your apple, how much do you have to earn to stay ahead in terms of real buying power? Let’s say that inflation is taking 1.5% annually. Assume an overall tax bracket of 30%, including any state or local tax. If a dollar earned is taxed at 30%, you have 70 cents, or 70% of your dollar left to spend. Adjusted for inflation: 1.5/.70=2.14. Ergo, you have to earn 2.14% on your invested dollars just to break even!

According to the WSJ, the average money market yield on 2/5/16 nationally was 0.27%; a 5-year CD, 1.32%. Yes, principal is safe but you are losing future buying power. With yields so low, it pays to shop around. Go to www.banktracker.com to get an idea of the incredible differences in rates paid. Some of the biggest banks, and the large advertisers (Super bowl ads ain’t cheap!), pay as little as zero on checking accounts and a puny 0.01% on money market accounts.

What you will see is that the type of savings institution and the type of account plus the deposit balance play a major role in the interest you garner. Online savings accounts and money market accounts usually offer higher savings rates because online banks have lower expenses from not having to maintain brick-and-mortar locations. It is not uncommon for people to keep an account with a local bank for easy and personal access to ATMs and other services, while stashing longer term reserve funds somewhere else for higher returns. Currently, interest in the 1.00% range on FDIC-insured savings is available from select banks. Many online banks will set up a link between your online account and another bank so you can easily move funds electronically back and forth.

Mark Twain famously declared, “I am more concerned about the return of my money than the return on my money.” You need a certain level of guaranteed “sleep at night money” for peace of mind. To beat taxation and inflation you have to move up the risk scale and base strategies on a well-thought-out comprehensive plan. But 1.00% or higher beats zero to 0.01%, for sure. One percent here, one percent there, and pretty soon you may be talking about real money!

Lewis Walker is President of Walker Capital Management, LLC. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC

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