Low interest rates good for borrowers, bad for savers
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.