The Savings and Interest Rate Paradox
The Federal Reserve recently announced that consumer debt declined in July for the sixth straight month. The continuing elimination of personal debt is a positive development on an individual level. Consumers are buying less of what they don’t need and saving money whenever possible.
At the same time that savings account balances are increasing throughout the country, banks are paying less interest than they have in a long time. With the proliferation of financial gurus and blogs advising people to spend less, save more, and pay credit cards off in full every month, the financial gain from saving is relatively low. For those who can get credit, these rates are low as well. It’s relatively safe to say it’s better to be a borrower than a saver at this particular time, if the borrowed money is put to good use.
This is the time to take advantage of low mortgage interest rates, for example. During a recovery following a financial meltdown, the rates will have nowhere to go but up. It may be some time before rates begin increasing, but it may be hard to go wrong with the low rates available today.
The only advantage to having money in a savings account right now — and I write this with most of my money in savings accounts right now as I have other life decisions to make before making significant changes — is to keep cash available at a moment’s notice. When the general public has once again abandoned saving in favor of buying overpriced and oversized houses, put your money in the bank. You’ll find you’ll be earning 5% to 6% with your money in no-risk, high-yield savings accounts.
Do you agree that it’s a good time to take your money out of savings accounts and put it to use?
Article comments
Due to economic crisis and soaring debt and the deficit, the United States has already lost its status as the superpower of the global financial system. To add more bad news, the soaring cost of health, social security nearing bankruptcy, high unemployment add more bad news to current economic woes of the American society. Bad decisions, bad policy combined with flawed decision-making process have practically killed/destroyed the foundations of Capitalism in America. But even considering all of the economic data & factors, we’re somehow still addicted to spending and some political “heavyweights” advocate even more borrowing & spending by the government. We’ve got to stop and realize that at some point we need to pay the debt, the younger generation of Americans will need to pay the debt, probably next generations as well… So what we are really doing now is taking liability and spreading slowly over next generations, so that they can deal at a later time? How about actually cutting/freezing all spending, conducting audits of all government spending & programs and start slowly and painstakingly cutting to save and to be a bit more fiscally realistic (and responsible?).
It might be “the only reason” right now, Flexo. But it is a very powerful reason. Of course, if folks have surpassed their desired emergency fund minimum balance, then why not?
Best,
Len
Len Penzo dot Com
“It’s essentially the concept of opportunity cost and a calculation of the equity risk premium.”
All these fancy ways to convince people to send their money to a bank when they need money in the bank to cover emergencies, not credit lines, not another mortgage they are unprepared for! Debt caused this mess and the best way to prevent it is to save money, in this case CASH! EVERYONE needs a rainy day fund to weather another storm.
“It’s essentially the concept of opportunity cost and a calculation of the equity risk premium.”
All these fancy ways to convince people to send their money to a bank when they need money in the bank to cover emergencies, not credit lines, not another mortgage they are unprepared for! Debt caused this mess and the best way to prevent it is to save money, in this case CASH! EVERYONE needs a rainy day fund to weather another storm.
“The continuing elimination of personal debt is a positive development on an individual level. Consumers are buying less of what they don’t need and saving money whenever possible.”
This isn’t a valid assumption. The stats show that most of this “debt elimination” is due to defaults, not people paying off their debt.
It is a combination, but I haven’t seen any data that shows that the decrease in overall consumer debt is mostly due to defaults. I’m looking at sources from Bloomberg, the Federal Reserve, Business Week, the AP et.al., all contributing July’s decrease in consumer debt to a decrease in the use of credit cards. What is your source?
It’s not really a paradox. It’s essentially the concept of opportunity cost and a calculation of the equity risk premium.
Equities/real estate, everything looks much more attractive now since savings rates are so low, and that’s where the incremental dollar shifts.
I think if you were planning on doing something with your money anyway, like buying a house, you’ve lucked out and it’s a great time to buy. We’ve seen houses in our area that were going for 6-700,000 a few years ago now going for 350-400,000. If you’re looking for a house you could find an amazing buy. On the other hand, having a nice nest egg saved up – especially in unsure times like this – is sure to give you plenty of peace of mind.
The problem with taking money out of savings and putting it to good use is, what if you need the savings? Job losses do occur, people get sick, air conditioners go out and always these things happen at the worst time.
Having money in savings is like having insurance. If you lose your job, you can continue to pay the house payment and buy groceries, if the A/C goes out, you can have it replaced. You might be able to get a loan for some of that, but if you’ve lost your job you might not be able to get that loan. And interest rates on credit cards will go up too. That A/C may end up costing more than you expect
@Jenny W
Don’t you think you’d like to enjoy at least a little bit of life while you’re younger? It’s great to save, but that doesn’t mean the first half of your life has to be purgatory.
Only after all the bases are covered. A simple analogy is this. Buy the ice-cream only after you paid for dinner! or – If you can’s afford your kids school clothes, pass on the Gucci glasses.
However, if you are out of debt, have your money under control, and have a plan to make sure retirement, collage savings (if needed), healthcare, etc, then Hawaii here we come!!!!
I am terrified of not having enough money to stretch through retirement years, so until my savings start earning better interest, I am not spending a penny on anything but the barest things I need, like shelter, food, and medicine.