Where Should Savings Be Put?
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. That said, the increase in savings was concurrent with a drastic drop in interest rates, meaning that interest bearing savings instruments now earn minimal returns. Low rates of interest return from traditional savings have led people to wonder what they should do with savings to get a better return and strategies for savings they should undertake.
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. Specifically, deposit your savings into an FDIC insured account, regardless of current interest rates. 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. With much of the rest of the world already going into active recovery, new investment opportunities are wooing away foreign investors from 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 goes up over the next few months, then there will be much better opportunities than anything available 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 mean not only that are many banks are being cautious about lending to private customers, but that they are also being careful about 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 to put savings into these banks might be worth the 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. Therefore, the best idea is to keep your savings liquid and do not lock them into anything. Once interest rates go up, many more opportunities will present themselves and at that point it would be worth the effort to shop around for the best rates you can find. 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.