Interest Rate Environment for Savers:
If you’ve been a long time income-based investor relying on FDIC insured bank deposits and savings accounts for your income then you’re probably like us – extremely dismayed by the current environment.
Take a peak at the top savings rates available (above) and you’ll see that even the best accounts are struggling to spit out just one percentage point in annual returns. This is a far cry from the lucrative days of 2007 and 2008 (pre-financial collapse) when savings rates were producing 5 and even 6 percent returns.
Luckily for us though, inflation is actually at a relatively low level (1.78% as of beginning of 2013 according to InflationData.com). This means that if we keep our money in one of these liquid savings accounts – whether it be a money market or traditional savings account – the interest you receive should at least be able to mitigate the value loss of your dollar. Back in 2011 inflation touched nearly 4 percent while savings rates were sitting in roughly the same place they are today. This meant an annual loss of nearly 3 percent on the value of your saved dollars.
In any case, earning SOME interest is obviously better than stashing cash under your mattress, therefor these financial instruments are still necessary even in a low interest rate environment.
Alternatives to Traditional Savings Accounts:
Not willing to accept a 1 percent yield on your hard earned savings? We dont blame you. Here are our two favorite alternatives to savings accounts. When we thought of these alternatives,we strictly had conservative, income-based investors in mind.
1) Consider Bonds over CDs and Savings – We made a decent argument for a number of bonds a little while ago. Our favorite types of bonds are municipal and corporate bonds. Keep in mind that with CD’s you are federally insured by the US government if you bank happens to fail, while with corporate and municipal bonds, if the particular corporation or city goes belly up financially, there is no insurance to cover your losses. Obviously, the other side of the coin is that you will get higher savings rates with these instruments, simply because of the higher risk involved on your part.
Do your due diligence before dumping your cash in any bond and make sure the institution issuing it is well funded and generally healthy. You may also want to review the order of the particular institution’s debt obligations (ie. in the event of it going belly-up who gets paid off first? Bond holders, employees, etc?).
2) Peer to Peer Lending – If you’ve been a frequent reader here at BankVibe.com, then you’ve undoubtedly heard us talk about using Lending Club’s notes (the leader in p2p lending) as an alternative to bank deposits and even savings accounts. They have produced annual returns above 9% since their inception 6 years ago. We go into more depth on p2p lending in the review, however, we’ll give you a quick run down here as well:
Peer to peer lending works similarly to a bank but cuts out the middle man. People apply for loans (usually for debt consolidation – school loans, credit cards, debt, etc) and you invest in the loans for a certain rate depending on their credit standing. These potential borrowers must submit all of their financial data just as if they were applying for a mortgage with a bank or credit union. You, the investor, can then sort through these “notes” and spread out your investment on a number of different types of borrowers based on risk. You’ll be able to see every borrowers employment history, monthly income, FICO score, and debt-to-income ratio. Spread your investment sum out on hundreds of borrowers with varying risk to diversify your investment.
Are corporate/municipal bonds and peer to peer investing a little too risky for you to stomach? Then you might just have to stick with savings and money market accounts. While interest rates are at all time lows, they really can’t get any lower meaning things should only get better from here. FED chairman, Ben Bernanke, has stated he will considere raising rates when unemployment reaches 6.5%. So we’ve still got a ways to go, but economic signs are pointing towards brighter days.