How to Increase Your Investment Income

Recent actions by the Federal Reserve will have a big impact on the interest rates paid on investments. Their actions mean you may need to use a different strategy if you depend on your investments for income! Read on to find out how you can boost your income with little risk, but only if you are patient. Guarding Your Wealth" is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group, a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients' investments. Please visit our website, www.guardingyourwealth.com to read past articles in our archive.

(PRWEB) July 14, 2004 -- Recent actions by the Federal Reserve will have a big impact on the interest rates paid on investments. Their actions mean you may need to use a different strategy if you depend on your investments for income! Read on to find out how you can boost your income with little risk, but only if you are patient.

The Federal Reserve increased the interest rate banks charge each other for the first time in four years. Sure, the modest increase from 1% to 1.25% may not seem like much, but it signals a major shift in the Federal Reserves handling and perception of the U. S. economy.

Interest rates are the tool the Federal Reserve uses to encourage economic growth and to keep inflation under control-similar to the brake and accelerator on a car. Over the last 4 years the Federal Reserve has been pressing the economic accelerator by moving interest rates to 46-year lows. And it worked.

The problem is that the faster the economy grows the more risk there is of inflation. So, in an effort to keep the growth on the right track, the Federal Reserve has tapped the brakes by slightly increasing interest rates. The economy is strong and the Federal Reserve is expected to continue modestly raising interest rates over the months and years ahead.

That is good news for income oriented investors. But you must be patient.

Bank Certificates of Deposit (CDs) are my bond investment of choice right now. They yield more than Treasury bonds and about the same as corporate bonds that have more risk. But dont be in a rush to lock your money up longer term, because the interest rates look better than they have in years.

It doesnt make sense to lock your money up for long periods of time when interest rates are going up. For instance, in just the past two months, interest rates on 1-year CDs have jumped from 2% to 2.4%. So by just waiting 2 months, you could have increased in your interest income by 25%.

Right now the Federal Funds rate is 1.25%, but the futures market is predicting that it could be as high as 3% by the end of 2005. That means the interest paid on 1-year CDs then could be twice as high as it is now. It is likely that by the end of next year you will be able to earn 4%, 5% or even 6% on ultra-safe Certificates of Deposit.

So if you are an income-oriented investor, now is the time to use short-term investments. But be patient. Dont put all of your money to work right away. The safest way to invest in this environment is to 'ladder your maturities.

For instance, if you have $300,000 of your investment portfolio allocated to bonds, divide it into two portions. Invest $150,000 in a 6-month CD and the other $150,000 in a 1-year CD. Each time one matures, you reinvest that money into another 1-year CD. That way you have a portion of your money coming due every six months and can reinvest it at a higher rate. Its a wonderful way to ride the tide of rising rates and maximize your returns.

Another great deal right now can be found in municipal bonds. For instance, municipal bonds with a 5-year maturity are currently yielding around 4.9%, whereas a 5-year Treasury Note is only paying 3.9%. Plus, you dont have to pay Federal Income Tax on the interest earned on municipal bonds. The Treasury Note would have to yield over 6.7% to give you the same amount as the municipal bond after taxes assuming you are in the 27% tax bracket.

Although I have used mutual funds that invest in bonds in the past, I am not using them now. In fact, I have moved all of my clients money out of bond mutual funds over the last 12 months. As interest rates rise, I will be putting that money back to work using short-term Certificates of Deposit or municipal bonds.

So be patient. Divide your money between 6-month and 1-year Certificates of Deposit. Avoid tying your money up for more than a year. That way, you will be able to ride the rising interest rate wave and see your income safely increase.

Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. You can receive free, clear, unbiased advice toll-free at 1-877-827-1463 or at jeff@guardingyourwealth.com

Looking for an energetic expert who is passionate about financial and wealth management? Mr. Voudrie is an excellent speaker who will excite and inspire your audience. Mr. Voudrie is available for a limited number of speaking engagements, television appearances and radio talk shows. For booking information, contact Christine Lavender at (877) 827-1463 or email christine@guardingyourwealth.com.

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