Where Should You Put Your Savings?
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Low interest rates mean low rates of return
The financial collapse that began in 2008 stimulated Americans to begin saving more, with national saving rates going up significantly over the last year. However, this increase in savings also coincided with a dramatic drop in interest rates, meaning that most interest-bearing savings instruments are now earning minimal returns. The low rates of interest from most traditional savings accounts have led many people to ask where they should put their savings in order to get a decent return and what sort of savings strategy they should adopt.
Forget about the rate
Basically all of the primary savings instruments – bank savings accounts, certificates of deposit, money market funds, and so on – are offering minimum interest rates for the time being, making any choice about as good as the other. Instead of focusing on current interest rates, consider the safety of your savings first and foremost. That is, deposit your money in a FDIC-insured account, regardless of the current interest rate. Therefore, you won’t lose anything beyond devaluation from inflation.
Interest rates are likely to increase
Despite the effect it may have on efforts to mitigate the recession, the fact of the matter is that the Federal Reserve is going to have to increase interest rates at some point to offset the decline of the dollar and to encourage increased foreign investment. A lot of the world is in recovery, and investment opportunities abroad are tempting investors away from opportunities in the United States. In order to keep competitive and balance out effects of declining dollar values, the Federal Reserve will have little choice in the matter.
What an interest rate hike will mean
For people in debt, an increase in the interest rate will have a detrimental effect as the interest levied on the debt will also go up; however, for savers the current low rates of return should also rise. As interest rates increase, it would be prudent to look around for the best deals available. For the time being, you should avoid putting your savings in any sort of account that limits your immediate access to it. If the interest rate increases over the next few months, there will be better opportunities available then compared to now.
The continuing credit crunch
Although the worst effects of the credit crunch seem to be over, the banks are still wary of lending to anyone without a good credit score and sound financial situation. This means that banks are not only being cautious lending to investors, but they are also wary of lending to each other. Eventually a lot of banks, including local banks with a lot of commercial real estate holdings, will be hard pressed to attract cash investors. Looking into savings with these banks might be worth the time and effort.
Basic advice for right now
Right now you are not likely to find any secure savings options that are paying decent interest, but this is bound to change in the foreseeable future. Thus, it is best to keep savings liquid and not lock them into anything. Once interest rates increase, more opportunities will present themselves, and that’s when it will be worth the effort to shop for the best available rates. Further, since rates are bound to go up, if you have much variable debt, perhaps you should consider using your savings to pay it off before interest rates go up.
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