How to Save in a Low Interest Rate Environment
The Federal Reserve has stated more than once that it has no intention of raising interest rates anytime soon, and that eliminates most, if not all, avenues of generating a decent return on any safe investment.
While we enjoy a low inflationary period during these times in general, at the same time we get almost nothing for a return if we want to invest in some type of cash account.
So whether it’s a savings account, CD, money market account, money market fund, or any other type of cash investment, you’re not going to get much of a return right now, and it doesn’t pay to invest in something long term just to get a couple of percentage points of interest.
There’s no doubt inflation will kick in in the not too distant future, and if you’re invested in something so you can beat today’s terrible short-term cash investment vehicles, you’ll pay for it in the long run when inflation really roars, which with food is already happening, and is expected to increase over the next several years, if not more.
The answer to where to safely put your money right now is in what we’ve already mentioned: a cash account of some sort. All I’m saying is no matter where that is, it’s not going to give you any type of return worth talking about, and in most cases almost zero.
So why bother with even doing it in the first place? First, you need an emergency fund built up to protect you. If you don’t have one, the last thing to be concerned with is whether you can get a little bit more interest for you money. The first thing to be concerned with is to launch a plan where you put away a certain amount each month to build up at least a six-month reserve in case of an unforeseen situation that may happen to you.
Next, we’re not only in an economic environment thinking in terms of making money, we’re also in an environment where preserving capital is just as important. To do that, you have to forget about interest rates when they’re as low as they are today, and think more in terms of preserving your capital.
One psychological aspect to keep in mind is you’re probably doing better today than you were about a year-and-a-half to two years ago when you could get a decent return of five percent on a safe account. The reason is inflation was high at the time, and so in terms of growing earning power, you do as well today as then because there is very little inflation now, although it is starting to go up in some areas, but not enough yet to make a big difference.
It’s not really any better in this particular interest rate environment, but neither is it any worse.
So in terms of low-interest rate investments, think on a short-term basis, because inflation will return with a vengeance, and you don’t want to be stuck with a puny long-term interest rate just because you could get a little better rate today for a longer term commitment of your capital.
I wouldn’t invest in anything over a year, and would prefer something much less than that. Even a savings account or money market accounts may be the best bet because of the needed flexibility to transfer funds quickly to a better investment when rates begin to rise again.
Finally, forget about rates as far as the determining factor in a safe-money savings plan. The point is to get in the habit of putting money away to have emergency funds available. Interest rates are secondary at this time, but that could change when the Fed decides to increase interest rates.
Until that time, there’s nothing to do but keep saving and waiting, as it’s probably going to be a least a year before interest rates go up, and so trying to force something to satisfy your desire to have better interest rates could come back to haunt you when they really go up and you may be stuck with a long-term investment that is losing ground to inflation.
Don’t panic and do something you’ll regret. Interest rates will return in time, and until then it’s best to place your cash in something you can have immediate access to than anything else. Flexibility rules the day in a low interest rate environment, and that’s more important than anything else, other than putting the money into something safe in the first place.
Tags: financial management, saving money
