savings

Beat low rates on savings accounts

Woman looking at low savings
Highlights
  • A financial plan should be an annual exercise.
  • Saving is job one after paying off credit card debt.
  • Less market risk means more inflation risk.

"Economic conditions ... are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."

That sentence, pulled from an Aug. 9 Federal Reserve statement, should send a chill through the heart of any serious saver. Because with those words, the Fed essentially said savers shouldn't expect higher rates on their deposits for at least two years.

Ouch.

The Fed doesn't directly set the rates banks and other depository institutions pay consumers on certificates of deposit, or CDs, checking accounts, savings accounts and the like. But the Fed has plenty of influence over the level and direction of consumer rates. When Fed rates stay low, banks normally follow its lead.

That bleak outlook begs an obvious question: What, if anything, can savers do to improve their position in light of the Fed's decree?

Here are three sound strategies.

Get a financial checkup

Even if you've already crunched the numbers, created a budget, cut back discretionary expenses and laddered your CDs, financial planning shouldn't be a once-done task, says Ronit Rogoszinski, a wealth adviser at Arch Financial Group in Long Island, N.Y. Instead, she says, "this exercise needs to happen every year, regardless of what the economy is doing."

If you haven't updated your financial plan in a while, start from square one. Review your income, expenditures, accounts and investments. A strategy that didn't make sense last year or in 2008 or 2009 might be a good option today. One idea to consider is a CD ladder -- an investment strategy in which you put your money in multiple CDs with different maturities -- with a longer time horizon, perhaps two or three years, instead of a year or less, Rogoszinski says.

A financial adviser or consumer credit counselor can help, she says, especially if you already have pinched every penny and have nowhere else to turn.

"If you feel paralyzed and just don't know how to make ends meet, speak to someone who can very objectively look at your expenses from buying gum to paying your mortgage, and see how your income is structured," she says.

Build your savings

Regardless of interest rates on savings accounts, saving is a must and should be top priority.

"A savings mentality is something you need to have during good times and bad times," Rogoszinski says. "We all have to get into the mode of 'I'm going to put money away first, and then pay my bills, and then, if there is something leftover, I will spend it on something I don't really need.'"

One exception: consumers with credit card debt at sky-high interest rates. They might need to forgo putting money in a savings account, so they can pay off what they owe, says Alfred McIntosh, principal at McIntosh Capital Advisors in Los Angeles.

Consider riskier investments

Savers who have zero risk tolerance might be loath to move cash into stocks or bonds, yet there are risks of not doing so as well.

Rogoszinski says the choice is often less about financial objectives and more about experience, style and mindset. Someone who has a lifelong history of buying municipal bonds or CDs isn't likely to plunge into preferred stocks or even mutual funds that buy preferred stocks today, she says.

Still, these cautious types might want to experiment, reallocating 10 percent of their portfolio at a pace of 1 percent per month, she says. If that gets uncomfortable, the pace can be slowed, stopped or reversed, moving money back to safer investments. Buying a dividend-oriented mutual fund rather than a single company stock can help to diversify the risk.

McIntosh says savers who avoid market risk must still contend with inflation risk.

"One risk is that your investment will drop in value," McIntosh says. "But the other risk, which is equally as great, is that your investment won't increase at a rate of inflation plus taxation. Inflation is around 2.5 percent. Money funds are paying less than 1 percent, and they're going to be taxed on that, so they're already losing money."

Investments currently on his shopping list include short-term bond funds, inflation-adjusted Treasury funds, international bond funds and emerging market bond funds, particularly those issued in the local currency.

"Emerging markets are doing really well right now economically and to the extent that their currencies will be strong versus the dollar, (that's) an added benefit." McIntosh says.

Either way, savers should take to heart what may be Rogoszinski's best tip: "There needs to be a lot of cold objective thinking ... because every single thing you do carries a certain amount of risk. It's really a matter of aligning your risk tolerance with the right product structure."

And that's true regardless of what the Fed says or does next.

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