Stacks of coins
Learn the best moves for savings growth

Borrowers love today’s super low interest rates. But savers are very much out in the cold as returns on checking and savings accounts, certificates of deposit and money market funds have dropped from small digits to near zero.

The harsh reality is that many people who depend on income from their savings to get by will have to make big changes or sacrifices in their lifestyles, says Terry Nager, president of Southern Capital Services, an investment firm in Daphne, Ala.

“If the dollars aren’t available, (account holders) have to cut their standard of living, go out on the risk curve to get more yield or (seek) employment, if that’s a possibility. They have to do whatever it takes to survive,” he says.

Savers who want other options don’t have many choices, but there are some alternatives to consider. Here’s a rundown of what you should know.

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Why are savings yields so low?

Low yield

The short answer is that the Federal Reserve has lowered bank interest rates to encourage banks to make more loans and thereby stimulate the U.S. economy. However, banks have not found many good lending opportunities, and since they can borrow so cheaply from the Fed, they consequently have no cause to offer higher rates to savers to attract more deposits, says David Rahn, president of First Foundation Bank in Irvine, Calif.

Depositors might see higher yields if the Fed reversed course and raised bank interest rates or banks loosened their lending standards to the point where they needed to attract more deposits to make more or bigger loans to corporations, small businesses, real estate developers and homeowners.

The near-term outlook for the Fed to raise rates is “bleak,” Nager says. That means savers should be prepared for the pain of lower rates for some time to come, even though the expectations of many experts who agree with Nager’s assessment may yet prove pessimistic.

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When you can’t afford more risk

College fund

People who need their savings for living expenses or a specific purpose like a child’s college tuition shouldn’t take on more risk to increase their yield, says Jim Wright, president of Harvest Financial Partners, an investment management firm in Paoli, Pa. Even though rates are low, short-term savers are well advised to stick with CDs or savings bonds that will mature when they’ll need the money.

“When yields are unattractive, the return of your principal is more important than the return on your principal. A money market fund yielding 20 basis points doesn’t look that exciting, but when you put in $10,000, you know you’ll get $10,001 back,” he says. “Returns on short-term bonds still aren’t great, but you’ll pick up more than a money market fund or by rolling over three-month CDs.”

It’s OK to shop around for higher yields on bank accounts and CDs, but rate-shopping alone isn’t an effective way to get a significantly higher return, says Nager.

“It’s always better to get a quarter more than a quarter less,” he says. “But rates are so low that it’s still not enough money, not enough cash flow, for people to accomplish their objectives.”

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Should you spend rather than save?

Woman pulling $50 bill from her wallet

Low interest rates can be a perverse incentive for savers to spend their nest egg rather than accept near-zero returns on their money. But Nager says this “inflation psychology” doesn’t work in today’s economy. Instead, savers should still forgo unnecessary spending and add to their savings.

Two arguments for saving are that deflation could make today’s dollars more valuable in the future and money spent now can’t be invested at a higher return tomorrow.

“You’re getting a low rate, but at least you’re building a savings balance for the future when rates go up,” Rahn says.

Some spending still makes good financial sense, including paying down high-interest rate credit card debt, refinancing a mortgage to reduce the monthly payment or taking care of maintenance on major assets like a new roof on a house or new brakes on a car.

“If the saver is employed and his or her job seems secure, spending could be reasonable on items that are essential for health and well-being and to maintain already acquired possessions and buy a few new things occasionally. But if someone is unemployed or their job may be at risk, spending should be limited to the essentials,” Rahn says.

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Invest in the ‘all-weather portfolio’

Investment portfolio

Savers who have a time horizon that’s longer than a few years can consider an investment portfolio that includes a mix of stocks, bonds, market hedges and precious metals, and that’s designed to earn a “decent total return” if not a fabulous amount of money, Nager says. This approach is not without risk.

“In January, I tried to figure out what we were going to do for (our clients) this year. I said, ‘I could lay out a great bullish case and a great bearish case,’ and we absolutely didn’t know which one it would be. … The price of being wrong is extremely high, and both paths looked very plausible,” Nager says. “That’s why I went to what we call an all-weather portfolio.”

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Gain higher yields, but greater risk

Yield and dollar signs

Savers who are willing to accept more risk in the quest for fatter yields can consider such investments as bond funds, dividend-paying stocks, real estate investment trusts or callable government agency bonds issued by Fannie Mae and Freddie Mac, Wright says. These types of investments offer the prospect of higher returns, but they’re not FDIC-insured so the risk of loss is greater as well.

“There is a risk whenever you buy a stock and people need to be aware of that,” Wright says. “The stock price could be lower in three years. But it is a way to potentially get a higher return on your investment if you have some time (before you need the money).”

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Additional resources

 Inserting coin to the bank

For more information on savings accounts, check out these stories at Bankrate.com.

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