Where to Look for Income on Your Savings
According to the Federal Deposit Insurance Corporation’s Weekly National Rates information as of October 5, the average interest rates for bricks and mortar bank accounts were as follows:
Savings accounts: .05%
Interest checking accounts: .04%
Money market accounts: .08%
One year jumbo certificate of deposit ($100,000 or over): .19%
Based on my research, returns on internet bank savings accounts was between .50% and .60%. This is about 10 times what the bricks and mortar banks are paying at this time. Overall, based on what the Federal Reserve has communicated we are not going to see much higher rates from either source until the economy recovers from the pandemic — which will likely take a number of years.
To gauge how devastating this is to savers using the rule of 72, it would take 1440 years to double your money if you kept it in a savings account at .05% interest. Wow! Is that depressing or what? At first blush, what this tells you is that you are going to need to save much more money to reach your long-term savings target or find products that offer higher returns to increase the return on your savings. In this post I will introduce you to some of my latest thoughts on saving and introduce you to the spectrum of possible products you can investigate to meet your savings and return needs.
Why Should You Save?
In a COVID-19 world, people often ask why they should save at all, but instead be solely focused on enjoying their lives in the short term. In reality, we will get past this pandemic and life will return to normalcy and at that time you will need to get back on track for making sure you have cash for all stages of your life. As a reminder, one of the cornerstones of personal finance is to annually save at least 10% to 20% of your after-tax salary and more if you can. This money needs to be set aside for your emergency fund and for creating available funds for specific needs (e.g., buying a house for your family) or for the time when you are older and not able to work. I believe you should save more than the threshold percentage because there may be years when you can’t save anything because of illness, being out of work or due to a family crisis you are dealing with as has been demonstrated by the pandemic.
The Impact of Low Interest Rates
As you can see above, the rates of return currently available from banks are historically low. Such low rates mean you need to find ways to save more to support your total savings goals or continue to work much longer to fund your needs. You are going to need to put more money away because what you save will not grow as fast as in other times in our history. For example, in my early 30’s you could get 12% interest on bank deposits – yes 12%. Using the rule of 72, you could double your money every 6 years not every 1440 years. Our near zero rates mean you must save as much as you can for as long as possible. If you don’t find a way to save, you will be required to continue working well into your expected retirement/fulfilling years.
Allocating Your Savings
One key question I frequently get is given the pandemic, should you stop saving for retirement and only look to build your cash balance. I believe, unless you are out of work or have had your compensation reduced to a level where you can barely pay your essential bills you need to first fully fund your emergency account and then look to save for your latter years. The reason I believe this is the approach to take at this time is that you may need the emergency account money to pay for your retraining to qualify for a new job or pandemic related medical bills. For example, if you are an airline pilot and get laid off you are likely going to need to find a job in a new field because air travel is going to take several years to recover from the virus. Overall, start with your most immediate needs and slowly fund your long-term needs. One thing the pandemic has demonstrated is that saving for long-term needs is essential and not a nice to have.
Ways to Increase Your Savings
The ultimate goal, though, is to increase what you set aside over time. If you can’t afford to set aside 10 percent to 20 percent of your income right now, start where you can and then find ways to boost your savings over time. Revisit my September 18th Moneysavers post on Six Steps to Cash Savings for ideas. The post has become one of our most viewed.
Repaying Credit Card Debt is A No Brainer
If you have outstanding credit card debt and are paying the normal 15% to 18% on your outstanding balance you must find a way to repay the debt. Saving money that earns .05% and paying 15% to borrow makes little sense. You need to really come up with a way to repay the balances. It may be the best use of your excess cash, particularly if you can reborrow the amounts paid back in an emergency situation. Please be careful with your unused credit as some financial institutions are cutting card members unused available credit as a safe guard against future losses due to lack of repayment.
Look to Non-Bank Asset Classes to Obtain Higher Returns
Due to near zero bank interest rates, many people are looking beyond bank cash savings products to obtain higher yields. If you are going to do this please obtain advice from a licensed financial professional. Getting advice will save you from making mistakes with your hard earned cash. On October 5, 2020, Fidelity Investments published the following chart as part of an article titled, Investing for Income in Uncertain Times. The chart clearly shows most all the asset options you have available to generate income. Again, getting advice to help you chose the assets that best fit your circumstances is essential. Please also read Paul Werlin’s July 3rd Moneysavers post, The Eternal Quest for Income, for great insights on this subject.
Source: Fidelity Investments. For illustrative purposes only. The chart above depicts long-term directional and ranking relationships among a number of asset classes on the dimensions of yield and risk compared to US common stocks as represented by the S&P 500 Index. The relationships and relative rankings among these asset classes will vary over time.
The economic situation created by the pandemic has caused interest rates to fall to near zero levels, put increased pressure on households to save and has caused savers to look at a variety of asset classes to find attractive returns. In my view, this situation will not improve for several years. Getting some advice on what options best fit your needs is more crucial than ever for money success.
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