The Federal Reserve recently announced their plan to keep interest rates at the already insanely low levels through until 2014. I could go into my theories about why this is actually harmful to the economy (delays capital investments by big companies, etc.), but I won’t.
For now, I’d like to just focus on the effect this move has on the every day consumer – you and me.
This move by the Fed does nothing to promote savings, and instead practically forces the average saver into more risky investments. That is exactly what it is designed to do. But when I see the herd coming I get out of the way and then take the opposite approach. Call me a contrarian if you wish.
It also encourages (in theory) people to put their capital to work buying houses, cars and making other large purchases. After all, why have money sitting on the sidelines earning 0.45% in a savings account when you could upgrade your house!
Not so fast. We are in some really frightening times, economically.
I believe that by this summer we could be dealing with a perfect storm of financial trouble, with unemployment continuing to rise, fiscal trouble escalating for the Euro, and here at home with more potential downgrades for the U.S.
As much as I hate to park money on the sidelines when interest rates are so absurdly low, I sleep better at night.
Now, that’s not to say ALL of your money should be in cash and sitting in a savings account. You need to diversify cash-based savings across a variety of savings vehicles and investments. Consider one or more of the following:
- Consider setting up a CD ladder
- Give investments such as I-Bonds a look (currently yielding 3.06%)
- Look for value in dividend stocks with a long track record of increasing dividends
- Investigate precious metals and mining stocks
- Consider upgrading something around your home that may reduce your monthly operating budget (tankless hot water heater, new AC, more energy efficient AC unit, improved insulation, etc.)
At a minimum, you should look to keep up with inflation so a paltry savings rate doesn’t cause you to actually lose purchasing power as those dollars sit on the sidelines, outside of the market.
Whatever you do, resist the temptation to splurge beyond which you feel comfortable. There is no reason to run out and spend or make a risky investment just because you feel you are losing money in low-yield savings.
Some may call me unpatriotic for not suggesting more people should drain their savings or take on increased debts to spur spending.
However, I say your first obligation is to your own financial security.