Savers Need to Think Creatively as Interest Rates Drop

The Fed’s July 31st quarter-point interest rate reduction may not sound like much. Undoubtedly, businesses, investors, and home-buyers would have preferred for interest rates to go down more dramatically — with guarantees of more reductions to come. With all of the trade concerns potentially affecting the economy, their wish might come true very quickly.

Unfortunately, individuals who are trying to prepare for a major purchase or a comfortable retirement cannot typically afford the risks associated with stock market investing to increase their financial holdings. You can take heart in the fact that some countries currently have negative interest rates, but you still have to find other ways to get additional funds into your accounts safely. 

A Savings Account or CD Does Not Grow on Its Own

A historical look at mortgage rates is a good indicator of general interest rates. Those rates peaked in 1981 as high as 19 percent; now they’re at historical lows. To a large degree, increasing your low-risk savings today means spending less and putting those funds away somewhere that provides the best return possible while protecting those funds against loss.

In other words, right now, your safe accounts will show appreciable growth only if you add more money to them. Of course, while it’s easy to add more money to a savings account any time, you would have to buy more CDs to increase your holdings.

Rate Shopping Can be Worth the Time and Effort

The chances are that your brick-and-mortar bank offers significantly lower interest rates than some of the online bank options. A little shopping can earn you as much as 20 times more. 

An Internet search will help you find charts like NerdWallet, which compare interest bearing account rates for savings accounts, CDs, and money market funds. Even these rates will not be huge, but every percentage point makes a difference over time. Plus, you can move your money from liquid accounts when rates rise in the future. Even with short-term CDs, you money does not have to remain there forever.

Thinking Twice About Every Spending Decision is Essential

You cannot put more money away if you spend it on items that you don’t need — or particularly want. Still, you can have most important items if you consider them carefully and plan for their purchase. The key is to avoid impulse-buying.

In a perfect world everyone would follow a strict budget, but this is the real world. You certainly cannot avoid the unexpected need for car repairs, but you can apply some simple, painless tricks to help you retain the money that you need to put away for the future.

One trick is to use the wish list features of many online stores. Shop for what you want, but put it in the list, rather than your shopping cart. It’s amazing how many of those items get deleted before you actually buy them.

Particularly when shopping for big-ticket items like cars, you can also save money by resisting top-of-the-line features. For example, how much money can you save by saying “no” to the monthly satellite radio subscription? Even at $5 per month, your savings will increase by $60 per year.

Finally, even when buying equipment for convenience purposes, take a moment to consider whether it really makes life easier. Perhaps you can save money, for example, by choosing a basic ink jet printer for your home rather than an all-in-one model that sends and receives faxes, which you may only need once or twice per year. A little research will reveal that there are many online faxing services that can do the job very well. In fact, if your needs are very infrequent, you can probably take advantage of a free trial offer, paying nothing to meet your needs.

Of course, none of your savings will help with future purchases unless you actually put them into an interest-bearing account. Whenever you save money, put it away before you forget about it.

Make Sure that Your Kids Understand How This Works, Too

Unfortunately, few schools teach children about money management, so it’s important to get them involved as soon as they can grasp some of the concepts. Perhaps the most important thing that they need to know is that it’s never too early to start saving for the future. Certainly, lessons on compound interest rates are important, but they also need to understand the value of choosing saving over spending when interest rates are low. 

Make these lessons personal to gain your child’s interest. Would Grandma’s $1,000 10th birthday gift compound enough in a savings account to buy a first used car at age 16 or even 18? Certainly at today’s interest rates, the answer is “no.” Your child will never want to save every penny received over the years, but a future dream purchase may be an inducement to favor saving over buying every new action figure that comes out on the market.

Nothing Lasts Forever

Hopefully, interest rates will never return to their highest levels from 1981, but they won’t remain low forever. Meanwhile, the more money that you add to savings now will offer you the satisfaction of seeing your balances grow. Plus, that money will be available to earn even more when rates increase!

 

 

Disclaimer: This content does not necessarily represent the views of IWB.

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