Interest rates on savings are best suck, but here’s what you can do about it
Today, I want to tackle a common question: when savings account interest rates best suck, how else can you get a return on your cash?
This is how it was phrased by one reader:
“Without any debt, I am a single young professional. I’m making a decent living. I have a 401(k), a Roth IRA and a fund for emergencies. My expenses at the moment are the usual rent, food, car insurance, etc. Currently, the money I save is just sitting and stacking up to earn a minimum interest rate in my savings account. I desire a better return but interest rates on savings are the best suck. What should be my next move in investing? For stocks? With bonds? Huh? Nothing? And how much risk is at stake? My next target would be to purchase a house in five years’ time.
The economy, and interest rates, were in an entirely different place when I started this blog in 2006. Several high yield savings accounts paid rates of more than 5.0 percent. Those same banks pay less than 1.50 percent today. Rates such as those barely reward you at all for saving. But this is not a coincidence: the government wants us to spend to stimulate the economy, not to save.
But the rest of the country is not about twenty-somethings.
In life, we’re in a unique place. We try to get started with emergency funds and save for first homes and retirement. We might be paying off student debt. And we do all of it on entry-level wages.
Regardless of what the economy is doing, we still need a little saving for twenty somethings. And when interest rates are best suck, so crappy, it is hard to do that.
There’s a solution here:
Your emergency savings do not need to earn much of a return, and they probably never will.
Just accept it. Your emergency fund is for emergencies, with living expenses of between six and nine months. It needs to be liquid in order for you to be available in a real emergency. (A natural disaster, for instance, which destroys your home). That means that in a savings or money market account it must be cash.
For most, this implies that high yield savings accounts online will have to do so. The rates aren’t great adn suck, but at a local institution they’re better than most can do. Plus, your money is just a withdrawal from an electronic transfer or an ATM.
2. Focus on Debt
Stop paying them before you worry about earning interest.
I do recommend setting aside between two and four weeks of expenses in an emergency fund, even if you are in debt. If something happens and you’ve saved nothing, you’ll just have to switch back to credit cards anyway. But if you’re in debt with a credit card, save only two to four weeks. Focus on getting rid of the debt then!
It is like getting a guaranteed return on your money when you pay down a credit card balance at 12, 15, or 20 percent interest. You just couldn’t beat that.
3. Then On Retirement
Stop ignoring this one and already save for retirement.
Contribute 10 percent if you have a 401(k) plan at work. Open a Roth IRA and contribute up to the annual maximum of $5,000 if you don’t, or you want to save more. Invest in mutual funds of the target date or simple index ETFs.
4. Finally, Stop Saving; Start Investing
You’ll have to take some risks to make real money to avoid rates that suck
When we reach a certain place in life, the trouble with online savings accounts and their low APYs arises:
- With our Emergency Fund, we’re happy.
- We don’t have debt on credit cards.
- For retirement we fund our accounts.
We have cash left over that we want to save for other life goals, such as buying a home, a car, or quitting our job to travel the world, if we manage our money well.
You don’t just want to save when you’re here, you want to invest. Be careful.
Although, with our retirement portfolios, young investors can take big risks (and hope for bigger profits thereafter), we should be more cautious about the money we want to use in the next five or ten years.
The Market Explore to avoid suck rates
So this is where learning a thing or two about investing and how to build a well-balanced portfolio pays off. You can still stick with mutual funds and index funds, but you’re not supposed to put all of your cash into stocks… I’d consider some bonds and cash personally, too. To begin with, I recommend that our resident guru, Mark Riddix, read any of our investment posts. That guy knows his things.
Then, with any number of investment accounts, it’s easy to begin trading.
Try using Social Lending to get rid of rates that suck
There is also the Lending Club for more adventurous investors, a peer-to-peer loan network in which you lend money at rates of between seven and 20 percent to others. Returns so far average 10-12 percent. Any investment is risky, and no exception is the Lending Club (your borrowers can default).
This year, I’ve put some money into the Lending Club and I’m earning about an annualized return of 11 percent. If that keeps up, you can bet that I’ll continue to make my financial strategy a bigger part of the Lending Club. Read more about whether it is a smart investment for the Lending Club.
Regardless of whether you choose a stock market, peer-to-peer loan, or other strategy, you should be able to earn gains of at least four to six percent a year if you invest wisely, without worrying at any time about losing a huge chunk of your capital. No bank account can accomplish that.
About the bottom line? If you have low savings rates and it suck, re-evaluate your finances to ensure that the bank is really where your money should be sitting.
- Need emergency cash? Just forget the rate even if it suck.
- Are you in debt? Just pay it off.
- Did you save yourself for retirement? Uh, do it!
- Otherwise, begin investing.
Consider accounts at fixed rates. In case something unforeseen occurs, it’s necessary to have some money in a quick access savings account. …
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Using a mortgage for offset. …