What Happens To $5,000 Parked In Savings
The average interest rate on a savings account at a major bank is 0.1 percent, according to Bankrate.com. Inflation is running at 1.7 percent. The result over 10 years, as shown below, is a lousy deal for savers.
If you have a savings account you probably already know this: Your money there is losing value to inflation. Yields are so low that returns are not even keeping up with the cost of living.
I've been watching some of my own savings dwindle. And that prompted me to take up a challenge: I'm taking $5,000 from personal savings and putting it to work. I'm not a financial whiz, pundit or any kind of guru.
In the coming weeks, I'll be reporting on the various investments I decide to pursue. Along the way, I hope to provide some useful information about avoiding high fees in mutual funds, bulk buying at discount stores as a hedge against inflation, and staking a claim in real estate for just a few hundred dollars. We'll keep a scorecard of my investments and track how they perform over time.
But back to those paltry returns from savings. Jacob Kirkegaard of the Peterson Institute for International Economics says it's an "absolutely miserable" time to be a saver and has been ever since the financial crisis began.
It's a freakish situation last experienced during the Great Depression. "We haven't seen a sustained period where interest rates have been this negative for this long. This is a truly unprecedented situation," Kirkegaard says.
When Kirkegaard says "this negative," here's what he means: The average yield, or interest rate, on a savings account at a major bank is 0.1 percent, according to Bankrate.com. Inflation is running at 1.7 percent. Do the math there. It's a lousy deal for savers.
For more than four years, the Federal Reserve has tried to revive the economy by getting credit flowing more energetically. In pursuit of that goal, the Fed has kept interest rates at nearly zero percent.
That's why yields are so skimpy on savings accounts. "So you can say that savers and the return that savers earn on their money is kind of a collateral damage in the crisis management conducted by the Federal Reserve and other central banks," Kirkegaard says.
My wife and I have a kid in college and a mortgage, I put money into my retirement plan, and anything left over goes into family savings. And, yes, it's kind of frustrating to see that money chipped away by inflation. It's far worse for someone on a fixed income who pays for food, rent and medical expenses out of savings.
So how about that $5,000? I stopped in to see Nessa Feddis, a senior vice president at the American Bankers Association. I asked her to make the best case for the savings account. "Bank accounts are FDIC insured," she says. "That means that no matter what happens to the institution, if the bank fails, no matter what happens to the economy, the customer's money is safe, up to $250,000."
"There's a convenience to having a savings account in the same institution where the customer's checking account is," Feddis says.
Convenience and FDIC guarantees are fine. But with the Fed expected to keep record low rates for a while longer, there's not much hope that those savings will grow. So I'm setting that cash loose into the world of risk and reward. The investments could lose value. But they could also come out ahead, which is something that can't be said — for now — for the money I have parked in savings.