Ways That Savers Can Beat Low Interest Rates | Get Financial Freedom Tips | Transform Your Financial Future


Tuesday, January 14, 2014

Ways That Savers Can Beat Low Interest Rates

Being a saver is a painful business nowadays. Just take a look at your savings account and see how much interest you are getting. You may feel that anything is better than nothing, but the truth is that at these rates, inflation means that you are losing money in real terms. It doesn't look like things are going to get better for the next while either – interest rates aren't going to go up until the economy improves significantly, according to the Federal Reserve.

Ways That Savers Can Beat Low Interest Rates

Of course, you can make a lot more money by investing in things such as stocks. For example, the Dow Jones is up over 20% this year, which sounds very tempting. However, remember what happened back in 2008 with the financial crisis. Your money can evaporate as quickly as it appears, so unless you are prepared to take the risk, investing in the stock market is no way to sleep soundly at night.

In the past, if you asked a financial adviser how to make good, risk-free returns, they recommended a Certificate of Deposit (CD). With this, you got a better rate of interest than with a savings account because you committed to keep your money on deposit for a fixed period of time. Also, CDs were – and still are – insured by the government, so you couldn't lose your money. However, CDs now have the same problem as savings accounts – while you can still find 6 month Certificate of Deposits higher than 1%, you certainly aren't going to get enough to keep up with the rate of inflation.

One option that is worth considering is treasury bonds. These are issued by the federal government, and can pay significantly more than a savings account or CD. However, to get these rates, you need to commit your money for a long period of time. For example, if you buy a 10-year bond, you will be able to get around 2.75% a year, and you’ll also get your original capital back from the government once the 10 years are up. However, if you need to sell the bonds earlier, other investors may not pay the full price that you paid. This is because when interest rates go up, the rate you are getting on your bond is less attractive – and so the price is lower to compensate.

Ways That Savers Can Beat Low Interest Rates

If you want to take a little more risk, then you can put your money into corporate bonds. Provided that you pick secure blue-chip companies that are unlikely to go bankrupt – such as Ford or IBM – then you will get your full original investment back once the bond expires, just like a government bond. However, the interest rates are higher. For example, Ford bonds pay between about 4% and 9% a year, depending on the type of bond you buy. However, keep in mind that you may have to wait up to 30 years to be sure of getting your initial investment back, and of course the interest you get is taxable.

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