The U.S. is living through a time of record low interest rates. That’s great if you’re buying a house, refinancing a mortgage, or paying down credit card balances. If you’re trying to save, however, it’s hampering your efforts.
So what are savers to do when low interest rates rule the day? As a family who has recently moved from aggressive debt reduction into savings mode, that’s a question we’re asking a lot these days. Here are a few strategies I’ve run across in my research:
Build a CD Ladder
Certificates of deposit generally offer higher interest rates than savings accounts. And longer term CDs have higher interest rates than shorter term CDs. But since your money is locked in for the length of the CD term, there is a tradeoff to be made between having quicker access to your money vs. earning higher rates. Building a ladder out of CDs is designed to bridge this gap.
Take the example of someone who has $5000 to invest. The investor can put it in a 1 year CD earning a lower interest rate or a 5 year CD earning a higher interest rate. Or, with a CD ladder, the investor can spread $1000 across five different CDs with different terms and rates, i.e. $1000 in a 1 year CD, $1000 in a 2 year CD, $1000 in a 3 year CD, etc.
With a CD ladder, some of the money is earning a better rate of return, but the investor is not tying the full investment amount up for five years.
That accomplishes two things:
- Some of the money is available sooner if a need should arrive.
- There’s a built-in hedge against interest rates rising during that period of time while the money is stuck in a lower earning investment.
That second point is especially important in an interest rate environment like we’re in right now, because there’s almost no place for interest rates to go but up.
Buy Dividend Stocks
Dividends paid on stock investments are a little like interest amounts earned on savings, except many stocks are paying dividend amounts higher than current interest rates. That makes investing in dividend stocks attractive to savers, and of course there’s always the chance that the price of the stock could increase in addition to the dividends, which would be even more advantageous.
But it’s important to note that money invested in stocks is not guaranteed, the way many savings and money market investments are. You can reduce your risk a bit by choosing more stable companies, but anyone hoping to increase returns using this strategy needs to be prepared for a drop in the value of the original investment. I’m a fan of dividend stocks, but mine are in a retirement account with a long investment horizon. I would like to invest in more dividend paying stocks in the future, but only after we have a more healthy balance in our emergency fund.
Stick It Out With High Yield Savings Accounts
Not all savings accounts are created equal. Some offer higher interest rates than others. Rather than defaulting to your current bank or financial institution, shop around a bit for a high interest savings account, paltry thought it may be right now.
You can sometimes unearth slightly higher savings rates by turning to the internet. And since you won’t likely need to interact with your savings institution as often as one that maintains your checking account, you can even think nationally.
Bankrate.com maintains a database of the highest earning savings and money market accounts. And even some companies that you don’t associate with traditional banking offer savings options. For instance, you can visit Discover Bank for more information about their high interest savings account.
Are you being more helped or challenged by this low interest rate environment? Do you have any suggestions for savings strategies during times of low rates?
Note: I am not an investment professional. These are simply my opinions. Contact your financial advisor for guidance about your specific financial situation.