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A decent return on savings

Millions of Americans are struggling to save more. The worst job market since the 1930s has convinced us that we need to shore up our personal financial safety net.

Yet it's hard to consume less and save more, especially when wage increases are minimal for those with jobs and pay cuts all too common for those with part-time work.

Low interest rates on our safe savings don't help. Barbara Friedberg, editor-in-chief of Barbara Friedberg Personal Finance.com has some thoughts on where to save.

Barbara Friedberg: For savers, retirees, CD, and money market consumers, low abominable interest rates are taking a toll. Consider a retiree who expected to ladder certificates of deposit over several years and get a nice 4 to 5% annual return on their savings. Today, the best rate she can get ranges from 0.79% on a one year certificate of deposit to 1.71% on a 5 year according to Bankrate.com.

Just a few short years ago, 4% was an achievable return on a 5 year CE. Not so today, or if we believe the Federal Reserve Chairman, Bernanke, until 2013. So what is the saver of today to do?

For Your Emergency Savings

This is money you need when your car needs a repair or you wake up to a soggy living room after a roof leak. This money must be immediately accessible and for those dollars, unfortunately, don't expect much of a return and keep the funds in a completely liquid savings or money market account. Don't worry about the return, but consider this money your "insurance" for unexpected expenses. And if possible, try to ramp the amount in this emergency fund up to three or more months of living expenses. This is your "peace of mind" money.

You Can Do Better--With Restrictions

The government has an investment that, at the very least, will allow your funds to maintain their value and not deteriorate due to inflation. The I Savings Bond is sold by the US government.

The yield on the I Savings Bond is composed of 2 parts. The yield will change on November 1:

Part 1: A fixed interest rate set at purchase. Currently, the fixed interest rate is a big fat zero! I'm assuming it will stay at 0% on Nov. 1

Part 2: Is a return based upon the current inflation level. For the past 6 months the rate was 2.3%. So, savers earned an annualized 4.6% return on their money.

On Nov. 1, 2011 the rate will adjust to the change in the consumer price index. It should adjust to an estimated 1.53% for the next 6 months. The 1.5% semiannual return is equivalent to a 3.06% annual return. (I'll update and put in the actual numbers when they come out next week.)

After six months are past, the rate will adjust once again in line with the inflation rate. If inflation goes up, so will the interest rate paid on your I (inflation) Savings Bond--and vice versa.

One caveat of these bonds is that you cannot sell them for at least one year. After the one year holding period, you can sell them at any time. If you sell before they are five years old, you will forfeit three months interest.

You can buy them in denominations as small as $50.00 and up to $5,000.00 bonds per year. When you sell the bond, you receive your initial principal investment plus all additional earned interest.

No financial advisor will recommend these, because there is not a commission for the seller. So, if you are looking for a place to stick your cash for the next year or more and believe the US government will be around for awhile, consider the I Savings Bonds!

About the author

Chris Farrell is the economics editor of Marketplace Money.
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