Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
Interest rates are currently so low that money sitting in checking or savings accounts is earning a zero percent return – or less.
To understand your real rate of return, you must account for inflation. If inflation is at 2 percent, meaning the cost of goods as a whole are rising by 2 percent a year, then money sitting in savings earning zero percent is actually losing 2 percent. Over the course of a decade, that would amount to a loss of more than 20 percent.
The Federal Reserve has promised to keep interest rates ultra-low until the economy gets back on its feet – that means rising housing prices, lower unemployment, increased wages and a healthy increase in inflation. The Fed thinks this will take until at least 2014.
So how can you grow your nest egg in the face of this Saver’s Quandary? Three ideas:
1. Tweak your emergency fund. It’s vitally important to keep a significant amount of money available in case you lose your job or face some other financial crisis. This money needs to be liquid, but that doesn’t mean it has to be in a checking or savings account; nearly all stocks, ETFs and mutual funds can be liquidated immediately, with the proceeds available to you the next day. Could those funds be worth less if you have to sell while the market is down? Sure, but the potential returns might be worth that risk. Consider this: Instead of holding $50,000 in checking or savings, put $25,000 in those accounts and $25,000 into a brokerage account earmarked for emergencies.
2. Consider other investments. This might be the time to make a down payment on a house, pay down your mortgage, or adopt a more aggressive growth-oriented investment strategy. Be sure to factor in your peace of mind when making these decisions. No matter how much return an investment offers, it’s worthless if it keeps you from SWANing (Sleeping Well At Night).
3. Be your own boss. Buy into a business, or help get a business started. In my book, “Starting from Scratch,” I interviewed 22 successful business owners who quit their jobs and made the entrepreneurial leap — many of them with only a few thousand dollars in the bank.
Or use some of your extra cash to go back to school to learn news skills that will increase your lifetime earning power. As the wise man said, investing in oneself is the best investment.
What are you doing to fight the Saver’s Quandary?
– By Wes Moss, for Atlanta Bargain Hunter