How Savers Can Take Advantage of Low Interest Rates

The unthinkable may become our new reality. Negative interest rates! What does that mean for your savings account at the bank? The answer is simple: The balance will go down by a small amount each month if negative interest rates become a reality. You will be charged for the ‘privilege’ of keeping your savings in the bank.

Although rates are currently not negative, they are nothing to write home about either. With a volatile stock market seeming like the last place you want to place your savings, for savers, there is a real dilemma brewing. What do I do with my money and still have peace of mind knowing that it’s ‘safe.

Luckily, savings has two components to it. The principal amount you set aside as well as any interest earned on your savings.

Firstly, it’s important to recognize that you shouldn’t throw the baby out with the bathwater and stop saving altogether. Having a rainy-day fund should be clearly apparent to everyone having just been through a watershed moment where our world literally stopped.

Creativity and out of the box thinking are going to be the name of the game when it comes to a savings investment strategy.

The biggest problem with leaving your money in a bank savings account is that that little you’re paid is well below the rate of inflation so each year your money loses value. So the perceived safety of not losing money by keeping it it the bank is not really true.

If you look at the difference between a dollar saved and a dollar invested over the long term, the investment will always outperform a savings account. The average return on the S&P 500 over the last 10 years or even 20 years you will see there is no comparison. But before looking at that lets examine how safe your money is in the bank versus a brokerage account.

Brokerage accounts have government protection up to $500,000 ($250,000 limit of cash) through the SIPC whereas the FDIC protects your savings accounts at the bank up a maximum of to $250,000.

With your principal protected by the government in bank and brokerage accounts the next thing you need to look at is risk.

The risk of doing nothing is going to cost you in one way or another because inflation will be outpacing what any savings, money market or CD will return to you. Rather than sit and watch your money devalue month over month, you can get creative by leveraging the huge difference between the return the stock market provides and the loss your bank savings are experiencing.

One such way is to only invest a portion of your savings in the market and leave the rest in a money market account at the brokerage. What this effectively does is provide the same or better yield on your savings account  your bank gives but exposes a small percentage of your savings to the stock market.

Over the long term, the market has typically yielded a return of about 9%. If you only expose 50% of your savings to the market long term, you can achieve a long term return of 4.5% vs 0.25%-2% rate by keeping it in savings. That’s a double rate of return with minimal risk and exposure.

The next question I get is what do I invest in? There are so many choices and I get intimidated just thinking about them.

Luckily the answer to that is simple. When it comes to investing in the ‘market’ there is really only one choice. Its an Exchange Traded Fund (ETF) called SPY. SPY is the S&P 500. You can keep your investing simple by buying this single security for a long term hold. You can also deal with the current volatility in the market place by using a strategy called dollar cost averaging which simply means putting your money into the market over several months rather than all at once to help offset the ups and downs.

By simply doing this, you will have the opportunity to double what any bank can pay you and keep your risk relatively low and your principal intact and most important of all liquid.

Looking for ways to get creative with what banks are offering will simply get you varying degrees of losses because no bank can pay you more on your savings than the rate of inflation and that’s bad news for your savings account! When thinking about how you can get ahead, think about this quote from probably the most successful investor ever, Warren Buffett:

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”