Dear Penny: How Can We Earn More Interest on Our Savings?

Dear Penny,

We sold our home to get out from under the credit card debt we incurred when my husband lost his visiting professor job after his department was downsized. We have $100,000 left after paying 75% of the debt. 

How can we earn some money with that money that is safe? It’s in a savings account for safe keeping but not generating any interest.

-J.

Dear J.,

I remember the days when you could plop your money in a high-yield savings account and earn 2% or 3% interest. Actually, there’s a good reason I still remember those days. I’m referring to 2019.

Then… well, COVID-19. To stimulate economic recovery, the Fed slashed interest rates to nearly zero. Now you’re lucky to get 0.7% or 0.8% APY for your savings account.

The Fed is likely to keep interest rates close to zero until at least 2023. That means the next couple of years will be great for borrowers and lousy for savers.

So how can you safely earn money on your money? Well, it depends on how you define the word “safe.” Specifically, it depends on the types of risk you can accept and just how much risk you can tolerate.

Unfortunately, risk is unavoidable — even if you avoid risky investments.

There’s zero chance you’ll lose money you stick in a savings account because deposits up to $250,000 are FDIC insured. Even if your bank collapses, the FDIC will step in to make sure you get your money back. Same goes for funds you put in a money market account or CD.

Likewise, Treasurys are considered the safest investments on the planet. They’re backed by the full faith and credit of the U.S. government, meaning that unless the federal government defaulted on its debt for the first time in history, your money is safe.

Any of the options above would be safe places to park your money without risking your principal. But they pose a different kind of risk: With interest rates so low, they won’t pay you enough to keep up with inflation. Technically, your money will still be there. But as the cost of living rises, that money will be worth less and less.

Until interest rates eventually rise, I don’t see a way to avoid loss of purchasing power without risking at least some principal.

That doesn’t mean you have to dump all of your savings into the stock market. But would you be comfortable with the risk of, say, investing 20% in stocks and keeping the rest of it in the savings account or CD that pays the best (or least terrible) interest rate?

You don’t say how close you are to retirement or if you’re retired already. Of course that makes a big difference here. If you plan to work for another couple decades, I’d recommend investing a lot more, though a three- to six-month emergency fund is still essential. If you’re already retired, I’d stick with 20% or maybe even less.

Investing in stocks doesn’t have to be risky, particularly if it’s money that you’re willing to keep it invested, even if the market gets topsy-turvy. The best way for most people to invest in stocks is simply with an S&P 500 index fund, which will give you an instantly diversified portfolio.

Yes, you will lose money if stocks tank. But suppose you invest 20% in stocks and the market plunges 20%. Your loss would be 4% of your portfolio, and it’s highly unlikely that it would be permanent. Stocks have historically recovered after crashes. Year over year, the S&P averages annual returns of about 7% after inflation.

A commonly cited rule is that you shouldn’t invest any money that you’ll likely need in the next five years. Stocks need time to recover should they drop. That’s why people approaching retirement often shift assets from stocks to bonds and cash equivalents, like CDs.

Unfortunately, historically low interest rates coupled with the volatility of the stock market in 2020 present a double whammy for retirees: With fewer options for fixed income, many seniors will have to choose between risking some money in the stock market vs. losing purchasing power.

If you think you’ll need your money sooner or you’re not comfortable with the risks of the stock market, you’ll need to accept the trade-off that your money will probably lose some purchasing power

A final thought: You still have some credit card debt, and credit cards charge 16% interest on average. That means for every $100 you pay off, you’ll save yourself $16. That’s a guaranteed 16% return.

Focus on paying off that balance so you’re not losing money to interest charges. Then you can decide how to earn money on your savings and how much risk you’re comfortable taking.

Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. Send your tricky money questions to DearPenny@thepennyhoarder.com.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

source https://www.thepennyhoarder.com/investing/earn-more-interest/?aff_id=178&aff_sub3=MainFeed__investing/earn-more-interest/

Add a Comment

Your email address will not be published. Required fields are marked *