I am always a bit curious when I read a cover story headline like the one on Kiplinger Magazine this month. It says 18 Ways To Earn 5% or More On Your Money.

A lot of readers will make an assumption that goes along with that headline that they are talking about low-risk investments or no-risk savings products. After all, it doesn’t take a degree in advanced personal finance to know that there are literally thousands of ways to earn 5% or more on your money. Of course, most of those also come with a way to lose 5% or more on your money too.

That is not what the article is about. Instead, this particular article, whose article title inside the magazine is, “Great Rates In A Low-Yield World” manages to give a better clue. The article is NOT about where to open a savings account to earn 5% or more. It is about how to get 5% YIELD on your investment. That is, 5+ percent as income, and not counting losses on invested capital.

Real Earnings Are About More Than Dividends and Interest

Unfortunately, while the article does indeed uncover available investments earning a 5% or higher yield, it ignores the potential change in value of those investments. If you are holding bonds to maturity, of course, this factor is moot, but if your personal finance needs change or you don’t plan on holding those munis for a couple of decades, then price volatility is a very real factor in whether or not you earn that five percent target interest rate.

The first way to earn more than 5% on your money on the list is taxable municipal bonds. Specifically, they talk about Build America Bonds (BAB) which in addition to having taxable interest, have a portion of their bond insurance paid for by the Federal Government. Long-term BAB are paying 6 percent or higher in many cases.

Of course, you better be planning to hold on to those long-term bonds for a long-term investment.

As any educated investor knows, bond prices fall when interest rates rise. This is true for Build America Bonds muni bonds too. So, the $1,000 you shell out to get the 6.6% 25-year Illinois bonds the article references will soon be worth much less.

While economists are predicting the Fed won’t raise interest rates until 2012, that still means that for the next 23 years, those bonds will be trading at a discount. That is not a pretty outlook for bonds.

If rates rise far enough and you end up selling those bonds for whatever reason, your capital losses will make your actual rate of return on the bonds far less than the 5% you were trying to earn more than in the first place.

Other money earning strategies on the list potentially have the same issue. The list includes some REITS, preferred stocks, and some exchange traded limited partnerships.

Nothing drives home this point more than the inclusion of British Petroleum on the list of ways to earn more than 5% on that money. Since magazines go to print months before they hit the newsstand, the article was written before the BP oil spill in the Gulf of Mexico occurred. So, on page 39, under “Juicy Dividend Payers” is British oil giant BP (with a listed stock price of $59) and its 5.7% dividend.

Unless you have been living under a rock, you know that this is one suggestion you do not want to take. Suggestions that BP eliminate or sharply reduce its dividend payment in order to retain enough cash to pay out mounting compensation and penalties are growing louder. Furthermore, the stock’s price has been crushed, closing under $34 per share on Friday. If you bought BP at $59 hoping for a nice juicy dividend, not only is that dividend likely to be much lower (if not zero), but you have also lost 40% of your original investment!

The point is not that this one suggestion turned out very bad, but rather that any one of the suggestions in that same article could have something happen to them as well. It wouldn’t take the world’s largest oil spill to turn a 6% dividend into a 3% yield, while at the same time wiping out 5% of your original investment.

Looking for ways to earn more interest on your savings is good. Knowing the distinction between savings and investments is even better. Don’t run down to your broker’s office with your savings account because a financial magazine or money management website touts higher returns. First investigate the risks and make sure you are putting the right dollars in the right financial asset strategy buckets.

US Saving Bonds

Bonds issued by the US Government are low-risk investments issued in order to finance the national debt. There are numerous types of Government bonds. Each bond has specific features that determine how much interest is paid to the bond holder, how long the bond’s term is, and how the bond is purchased. The different kinds of bonds are known by their "series" letters. Series E bonds are one of the kinds of US Savings Bonds.

The last of the Series E Savings Bonds stops earning interest in 2010, which means that anyone still holding Series E Bonds is losing out on interest payments soon. Smart financial planning tips from many experts suggest re-evaluating Savings Bond advantages and disadvantages before automatically rolling them over into new Savings Bonds like the current Series EE Savings Bonds.

History of Series E Savings Bonds

Series E bonds, or Government E Bonds, were first issued to fund World War II efforts. The bonds were commonly known as war bonds. The very first E bond was purchased by President Franklin Delano Roosevelt. The term E bond was just an extension of the original savings bond naming system. Earlier bonds were called "baby bonds" and were named as Series A, B, C, and D bonds. Thus the question What does Series E bond mean can be answered best by saying that it only means that E comes after D.

Early versions of US Savings Bonds were sold through the Post Office. People often still ask about buying Government Bonds at the Post Office as a result of either remembering the earlier practice, or having heard about it from older relatives like parents or grandparents who used to buy bonds in that way. Today, US Savings Bonds are sold by some banks, although the majority are sold through the U.S. Treasury Direct Website for selling savings bonds.

Quick interruption for the writing business start-up guide.

In 1941 when the Series E bond was created, a national volunteer program was created. The country’s business leaders and financial institutions helped sell the war bonds. The sale of Series E bonds allowed the country to quickly increase production of goods needed to fight World War II and continue funding the war effort in general. This patriotic slant toward the sale of bonds greatly increased the number of households with bond investments and raised awareness of U.S. Government Savings Bonds.

Savings Bonds became a staple of most personal financial planning advice because of their safety and low minimum investment.

Characteristics of Series E Savings Bonds

>E Bonds were issued for a fixed-term. The bonds matured after 10 years, but could be granted extensions that allowed them to earn interest for up to 30 or 40 years, depending upon issue date. E Bonds that were issued between 1941 and November of 1965 earned interest for 40 years. The other E bonds issued between December 1965 and June 1980 earned interest for 30 years.

Series E bonds were first sold in 1941 and continued to be issued until they were replaced by Series EE bonds in 1990. That means that the last Series E bonds stop earning interest in 2010. Series E bonds issued before September 1979 have already stopped earning interest.

E Bonds were originally sold for 75% of their face value and they earned 2.9% interest. Original denominations were $25, $50, $100, $500, and $1,000. Later, a $5,000 and $10,000 bond were added, and soldiers were offered a $10 denomination.

The recession might be ending soon, depending upon which economists and other financial forecasters you believe.  But, that doesn’t mean that people aren’t still looking to save money.  In fact, if one good thing comes out of this recession it will be that people have been reminded that money isn’t free, credit isn’t always easy to get, and saving for emergencies and opportunities is more important than remodeling the kitchen.

That being said, it isn’t always easy to find ways to save money.  Many family expenses seem pretty fixed and finding ways to make cuts can be hard.  The savings tips and saving tricks found in most money magazines, newspaper financial sections, and finance websites have been around the block a few times.  Many have lost their effectiveness, others were just never very helpful in the first place.

Saving Tips and Tricks Section

I’m happy to announce that today the Finance Gourmet website will begin building a new money saving tips section for our readers.  We’ll repeat some of the oldies but goodies (there is, after all, a reason that they are oldies but goodies).  However, we’ll also tell you about money saving tips that you might not already know about.  Some of them are easy, and some of them are harder, but they will all be worthwhile tools to add to your financial knowledge arsenal.

And, I guarantee that it won’t be the same old, "Make a budget, and cut back," advice you’ve seen a thousand times before.

Keep an eye out for our first money saving tips later today!  Or, do yourself a favor and grab the Finance Gourmet Feed instead.  That way, you won’t have to remember to get your tips, they’ll come automatically to you.

— The Finance Gourmet

If you have money in a 529 plan to save for college, good for you.  529 plans represent one of the best vehicles for educational savings, and with the cost of tuition skyrocketing faster than anyone can keep up with, they also represent the middle class’ only hope of paying for even 1/2 of a college education in the future.

When 529 plans were created, lawmakers attempted to correct some of the perceived issues with 401(k) plans which are similar in nature, but with a different goal.  One of those issues was that the majority of 401(k) plan participants were doing it wrong, that is, investing incorrectly.  One such problem was changing their investments too often in response to news events or media hype.

The solution implemented in 529 plans was that they were restricted to just one reallocation per year.  In other words, if you started 2009 with half your money in the S&P 500 fund and half your money in the International fund, you could change that to something else, but only once for all of 2009.

This restriction only applies to monies already in the account and exchanging that money between investments.  You can change where NEW money goes at any time.  Thus, in the example above, the account owner could switch to 25% S&P 500, 25% International, and 50% bonds on March 1st, but then they could not adjust that mix again until 2010.  However, the investor could elect to have all future contributions to go 100% to the Money Market fund on March 20th, and could change that again on April 19th, and so on, at any time.

2 Re-Allocations Investment Exchanges in 2009

Congress passed a law changing the rules for 2009 only.  In 2009, the account owner of a 529 plan may make TWO changes to the investment allocation of the existing funds.  One could therefore make a change now, and another change in September, for example.  The extra change cannot be rolled over and it does not apply to 2010, as of this writing.

Ironically, this action only proves the point.  Congress knows that people will be freaked out about their investments this year.  That means they will want to make the same kind of current events based investment decisions that were trying to be avoided by having the once a year rule in the first place.  Doubly ironic, is the fact that if one were going to “go safe” it probably should have been done in 2008.

With the new twice this year feature, Congress allows people to go safe now (too late) and then go back to “normal” later this year (probably too late as well). 

If you are sitting across the dinner table from a 15 year old, then you have a pretty tough call to make, especially if you have already rung up huge losses.  You are still probably better off sitting on the investment strategy you calmly and carefully analyzed when you were not scared, assuming that is how you picked your investments in the first place.  While there would only be 3 years until the account was started to be withdrawn, if you are looking to use the money over a full 4 or 5 years, then you are still looking at 7 or 8 years total.  There will most likely be some kind of recovery during that period.

Bond prices can only go down from here because higher interest rates cause lower bond prices and interest rates are already at zero…

If you are looking at someone under 10, do NOT panic.  Now is not the time to go 100% bonds, and it is most certainly NOT the time to go 100% money market.  The 20% recovery the market has already had from its lows earlier this year was the best way to get some of your money back.  You have 8+ years until the money is needed, let the markets do their work during that time.

You current contributions should be going into equities.  Pick a market index fund, or one of the “growth” allocations available in your plan.  Yes, there may be some more downside in this market, but you will be buying cheap if you are buying into stocks now. 

The opposite is true of bonds.  Never forget that bond prices go DOWN when interest rates go UP.  Interest rates are currently set at 0% basically.  That means it is GARAUNTEED that interest rates cannot go down, they can only go up.  Do the math and that means that for anything but the short-term bond prices can only go down.  Why would you buy an asset that is assured of losing value?

Once any sort of recovery begins, the Fed will have to start raising interest rates, and when they do, bond prices will fall.  The only way to avoid this is to own individual bonds and hold them until they mature.  For bond mutual funds, they can only lose money once the recovery begins.

A quick word about money market investment options: College costs are increasing at 7% per year on average.  If you are earning 3% in a money market (fat chance) you are losing 4% of buying power each year.  Yes, it is painful to watch the account value go down, but it will come back and over time, the market returns 9% to 11% depending on who you ask, and how you count.  In other words, your only hope to keep up with the 7% inflation of college tuition is to get that 9% in the stock market.  There is no other choice.

If you can’t or won’t listen, then that is too bad for your children, but AT LEAST make sure your current contributions are going into equities.  They won’t go down much more, but they could go up a lot.  Maybe that will be enough to make up for making the other decision.

Too harsh?  Leave a comment or shoot me an email.

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Save Some Money This Holiday Season

Looking for some creative ways to save some money with the economy looking shaky and the holiday shopping season fast approaching?  Here is one way to save some potentially big dough.

Microsoft Live Search CashBack

Microsoft is literally giving away money to get people to try out its new search engine called Live Search.  You can find it at www.live.com.  Make sure you sign up for the CashBack program and use the right CashBack search screen, not the regular Live Search screen.  Read all the technical details about Microsoft Live Search CashBack.

Some vendors have pretty big cash back amounts.  JR.com is a big electronics outfit and they currently have 6% cash back offered.  Sound good?  I’m glad, but keep reading.

Pair this up with a good Cash Back Credit Card and you can be talking about some real savings.  Even if you are out of your special offer period and only get 1% cash back, that adds up fast.  A $1000 digital camera package would qualify for $60 in cash back from Live Search CashBack, plus the extra $10 you would get from your credit card cash back adds up to $70 in savings.  That would buy your nephew a really nice Christmas present for free!

Keep an eye on the FinanceGourmet.  We’ll be bringing you great savings tips to help out during these tough financial times all through the holidays, and into next year.

Remember, only 64 shopping days until Christmas!

A few years ago, I subscribed to Men’s Health magazine.  (I also made the mistake of subscribing to their emails which now come from Rodale and others on a daily basis filled with 3/4 ads for whatever book they are pushing, and 1/4 “tips”.  I’ve tried to unsubscribe to no avail, so now they have a home in my spam list.)  Each month, I would get new workout tips.  A hot new exercise to target my abs, or a new twist on an old routing to kick it up a notch.  The catch was, I wasn’t really going to the gym that much in the first place.  Frankly, I would have been better off doing nothing but push-ups, sit-ups, lunges, and curls three days a week than trying out new stuff and going once a week (if I was lucky).

For finance, I’m starting to see the same thing in my clients.  I have clients and friends who have read dozens of finance books.  They have opinions about all sorts of things from where the best place to invest is, to when to pay or not pay fees and so on.  Yet, many of them don’t even have a cash reserve fund, let alone enough money to worry about investing details!

Folks, it doesn’t matter if you can squeeze an extra two percent return on your investments if you have $500 in savings, $20,000 in your 401(k), and $3,000 in an eTrade account.  You are a debt problem waiting to happen.  The first major car repair, furnace repair, or medical bill wipes out your savings.  Then what?  Then people call me asking if there is a way to get to their 401(k) money.  All the while, they are obsessing over the latest trends in investments and whether the Street is crooked.  It doesn’t matter if you aren’t even going to the gym!

Start Small and Simple

Ok, let’s make it worth your while to know all about investing.  First, you’ll have to have money to invest.  It comes from saving money.  Do the easiest, simplest thing first.  Open and INGDirect account and link it to the account where the paycheck gets deposited.  If you get paid on specific days (the 1st and the 15th), then setup and automatic transfer to your ING account to occur one day later (the 2nd and the 16th).  One day later makes sure that your paycheck will be there when the withdrawal comes regardless of weekends or holidays.

Don’t worry about where you could get a tiny bit higher interest rate.  Don’t worry about whether or not now is a good time to invest in oil or gold or China.  Just build up some dough!  Go to the gym!  That is all we care about right now.

AFTER consistently going to the gym 3 days a week for 3 months, THEN we can look at routine changes.  Hey, by then we might even be in shape enough to do some of them.  Same thing for personal finances.  After we are able to build up $10,000 or more, THEN we can look at investment ideas.  Frankly, $10,000 is too low, but hey, at least you got that much.  Actually, you need $20,000.  $10,000 for those great investment ideas, and $10,000 to leave at ING, because after all, that air conditioner hasn’t been serviced since the year started with a one.