Interest-rate options vary, but link to time, amount
''Many of us have enough money to be concerned about, but not enough to attract professional assistance.'' That, says Gordon Ramsey, a partner in the Los Angeles office of Coopers & Lybrand, an accounting firm, is one reason so many people are confused about all the savings alternatives. They have more choices than ever before, but selecting the most effective ones is a problem. There are just too many variable factors to consider, in addition to the sheer number of choices.
For instance, he notes, there are about eight different kinds of certificates of deposit (CDs), two new bank accounts (one called money market deposit accounts, the other Super NOWs), hundreds of money market mutual funds, at least three different US Treasury securities, a variety of annuities, checking and savings accounts.
As with any purchase, the more money you have, the greater selection you have. If you have less than $50, you are pretty much limited to savings accounts , US Savings Bonds, interest-bearing checking accounts, and ''small saver'' certificates.
Up to $1,000, the choices increase to include more CDs, some money market funds, and individual retirement accounts.
It's at the $1,000 threshold that the choices start to broaden significantly. Here you can buy some corporate bonds and bond funds, most money market funds, Treasury bonds, additional CDs, fixed and variable annuities, and tax-exempt (municipal bond) unit trusts.
The new money market deposit and Super-NOW accounts available at banks and savings-and-loans start at $2,500. There is a CD here, too.
At $5,000 there are some tax-exempt municipal bonds and Treasury notes.
A check for $10,000 will get you into Treasury bills; $25,000 will buy a security issued by the Government National Mortgage Association (Ginnie Mae); and there are CDs that sell for $100,000.
For many people, the first thing they look at with these instruments is the interest rate. However, Mr. Ramsey points out, there are a number of other factors that should be considered.
First, depending on the type of institution - and sometimes the individual institution - the compounding of interest rates can vary quite widely. Some compound daily; others do it weekly; others just do it once a year. On a large investment, more frequent compounding could mean several hundred dollars of additional interest.
Also, any look at general interest rates (as in the accompanying chart) is just that, a general look. Rates can vary widely around the country. For example , a recent issue of Bank Rate Monitor, a Miami Beach, Fla., newsletter that tracks money market deposit and Super-NOW accounts, found a savings-and-loan in New York paying 9.05 percent on a money market deposit account. Meanwhile, a bank, also in New York, was paying 8.25 percent. A Detroit bank was paying 8.4 percent, while a Los Angeles bank was paying 8.5 percent.
Liquidity, the ease and speed with which you can get at your money, may also be an important consideration in selecting a place for your savings. Passbook savings and interest-bearing checking have excellent liquidity; you can get your money almost on demand. Money market funds are also very liquid; you have your money today by writing a check on the account, or tomorrow with a phone call.
Certificates of deposit, on the other hand, are not very liquid at all. To avoid losing interest and incurring early withdrawal penalties, you must leave them alone for the full term. But then, they usually pay a slightly higher interet rate for the privilege of keeping your cash out of reach.
Some fixed and variable annuities have fair liquidity, with somewhat liberal early withdrawal provisions. However, the federal government has imposed its own 5 percent penalty for taking out your money in the first 10 years.
Market risk, particularly on uninsured vehicles, should be also be considered. Municipal bonds, for instance, are usually considered quite secure. But if interest rates shoot up, your bond may not be worth as much as it was when it was bought. If you need the money before it matures, you may be able to sell the bond on the secondary market, but perhaps at a discount.