Low interest rates good for borrowers, bad for savers

Americans are saving more of their earnings than they have in years, and that's a good thing. But unfortunately, we're not being rewarded for it the way we were in flusher years.

By now, everyone has heard about the government's unprecedented actions to drop interest rates to historic lows so cash-strapped individuals, businesses and banks can borrow on more forgiving terms. The down side of this is that bank account holders are now getting rock-bottom interest returns on their money.

Currently, we're saving around 3% of our collective income. That's not really an achievement to be proud of -- not yet, anyway --- but it's still a great step up from where we were a couple of years ago when the U.S. had a negative savings rate, meaning that we as a nation were literally spending more than we made.

Unfortunately, though, if we sock this 3% into savings accounts, we're likely to earn only a fraction of a percent in interest on that nest egg.

While there are other investment vehicles such as CDs and money market accounts (for which interest rates are also taking a beating), many people prefer plain old savings accounts.

For people who only started saving when the downturn took hold and only have a small cushion, a savings account may be the most prudent choice in case they suddenly need to dip into that emergency fund. Even CDs don't look like such a hot deal anymore.

The Associated Press recently wrote about
a comparison of the average interest rate earned on a one-year CD now versus a year ago. Last year, that rate was 2.53%; it's now sunk to a paltry 0.88%.

It presents a vexing problem for many Americans, especially those who depend on the interest their investments earn to pay for day-to-day living expenses.

Do they keep their money parked where it is and just get by on less, or chance a riskier option like the stock market just to boost their returns?

There's no one-size-fits-all answer, since people's spending habits, comfort with risk and other variables are all so different, but it's worth consulting with a financial adviser if you're in this position, because these current ultra-low rates aren't going away anytime soon. The Federal Reserve has signaled it plans to keep rates low for at least several months into the future.
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