Savings

Did you know that you Money Market Account could have sub-prime mortgage exposure and thus you could your principle? Did you know that they are also not FDIC insured? Its true, MMA’s invest in RMBS (Real estate Mortgage-Backed Securities) and other SIVs (Structured Investment Vehicles). Both RBMS and SIVs can be used to invest in sub-prime or alt-A mortgages, both of which are a risky proposition right now. Maybe even prime mortgages are risky too. With such lax underwriting standards the past few years, it really isn’t a surprise that there are so many defaults occurring.

Another thing to consider is that MMAs are not covered by FDIC.

The fact that FDIC may not even have enough money to pay out all the investors if several banks go under is a separate discussion.

Also, stay away from savings accounts with banks that have significant mortgage exposure. If you have less than the FDIC limit of $100,000 you’ll get your money back, eventually, but its still a hassle.

Banks like Countrywide, which is facing HUGE mortgage-related losses, could fold and unnecessarily tie up your money for several months. Much better to spread your risk around.

I do not have a money market account. And I have my savings spread out between Bank of America, ING Direct, Commerce Bank and Capital One Bank. Maybe I’m being paranoid, but based on the impossible black-swan events that keep occuring in the financial markets, I’d rather be safe than sorry.

In fact, I think keep my cash in a brokerage account with no exposure to mortgage-backed securities may not be a bad idea. Most brokerages are covered by SIPC rules which extend to $500,000. And buying Treasuries, Munis or even Senior Income Trusts like VVR may not be a bad idea!

Since I decided to kick the old job (which was a hard habit to break), I’m going to be more reliant on my passive income. Part of my passive income comes from Canadian Income Funds, some of which pay out over 16% in annual yields. They pay out the dividends on a monthly basis and after tax (which the Canadian Government takes out at source) it still works out to over 1% per month. This is about 3 times what I get in my savings account!

Also, being enrolled in the dividend-reinvest program (also called DRIP) my dividends are used to buy more stock every month without paying a commission. Any best of all, some stocks offer a discount to the prevailing market price.

I added to my position in Harvest Energy Trust (HTE) yesterday. I calculated I have too much money in savings, even if I don’t have a job for the next year. So I decided to take a little bit of money (from my Bank of America account, which pays half a percent in interest) and buy something that yields 16.5% per year (just over 14% if you consider the Canadian Tax). While the monthly increase in my cashflow is not significant, its still a good optimization of my resources. And after all, leveraging and optimizing one’s resouces is how you get rich. Their DRIP offers a discount too.

If it drops a bit from here, then I’ll probably buy more, else I’ll buy Australian Currencyshares Trust (FXA), which pays out ~5.5% yield. If the Federal Reserve cuts the rate tomorrow and the Reserve Bank of Australia boosts it next week, we could see parity between the USD and AUD in fairly short order.

In the long run I think energy prices are heading higher and the USD is heading lower. Having the conviction to follow through with your beliefs is also an important factor to becoming rich. Either way, I’m pretty sure exchanging my USD for something else is a good idea.