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Saturday, August 20, 2011

The Punishment of Savers: Why Save?

It's not like you don't know this: savers have been punished over the past few years and will continue to be punished. That is because interest rates are artificially low: this benefits businesses and borrowers, but not individuals looking for some safe returns. This is especially bad for the elderly and retired, who have no income coming in.

If you don't believe me, the Wall Street Journal wrote about it.

My high-yield savings account is now at 1%. Recently, a financial mag had a headline trumpeting "Get 5 times more for your savings!" What they meant was that you could move money from a .2% account to 1%. That wouldn't make much difference, unless you had a big balance. The $5000 account would get $50 vs $12--good for some groceries, I guess. Oh yeah--you have to pay taxes on the interest, so the spread just contracted.

So why save? What else is the frugal person to do?

How I wish my children were in the market for a house!


Shelley said...

It's true that I'm putting more in to the stock market just now, mainly because I have very little there and want more 'balance', but it's only £100 a month. Why save? Well, if I were to spend then I would have nothing for fixing the house when it needs repairs, nothing to contribute towards holidays, nothing to save me if anything happened to Bill. I can draw my Oklahoma pension now but it's something like $400 a month and next to useless by the time I convert it to GBP. Even if an emergency fund doesn't grow, several months of income put away for a rainy day is still useful should a rainy day appear.

On the other hand, go ahead, spend all you earn, don't save anything.... you wouldn't do that would you?

Carolyn Cummings said...

Yeah...we get frustrated by this, too. As young marrieds, its difficult to put aside money for any length of time because some emergency is always pulling it out again. Other than my 403B, which is of course involved in the stock market with all its tawdry ups and downs, we find we end up saving very little for the future. This is something we are trying to remedy this year, but it is frustrating that there is so little financial incentive to do so.

Anonymous said...

Yeah... it does make pre-paying the mortgage more attractive. Or just spending! And stocks are more attractive, except with the recent up and down gyrations that's still only a place for long-term money.

RoseAG said...

Saving is important because there are times in life when ready cash will be the difference between a problem and a solution --

I think the current interest rate situation should be a message to those of us who aren't retired yet to work on diverse income sources.

In theory, low interest rates should result in higher stock prices so if you held stocks and interest bearing assets they should balance out.

It's not unreasonable to consider other retirement income sources such as rental income. It isn't guaranteed to always increase but it's somewhat independent of income.

see you there! said...

Indeed! Those who saved and lived within their means (i.e. houses, debt) see little reward in this financial environment.


Anonymous said...

Perhaps, you SHOULD purchase a home for a child. And rent it out until they are ready for it. This would create a bit of a tax hedge at the very least.

Duchesse said...

Buying a home-as Darla suggests-a form of saving; many people view a mortgage as 'forced savings'.

There is spending and then there is reallocation among different asset classes, and I know you know the difference!