Question: My wife and I have been putting our extra savings money into CD’s at our Credit Union in order to have it be liquid but make us money. Just recently we discovered that the rates have gone way down to where it really doesn’t seem worth it. What can we put our money into so that we can get a decent return but still have it be liquid if we need it for any kind of emergency? Jeff, Farmington, MN
Answer: This is the question everyone is asking these days. We’re all trying to save more these days. But is it worth it when we’re getting somewhere between 0.1% and 1.2% on our safe money? My answer is yes, it’s well worth it to take the low rate on savings. It’s the price you pay for safety. There is too much risk associated with reaching for yield.
It also means that it’s financially savvy to make sure you’re paying nothing to a mere fraction in fees on any account. I learned this when I lost money on a small IRA I had in a money market mutual fund. The loss came from the fee. (I moved the money.).
I do worry that today’s low savings rate will discourage people from building up their own personal finance safety net. I know that is the intent of government policy. The idea is that low rates will encourage you to spend some money rather than save it. The other possible effect is that low rates might push you toward riskier investments that offers a higher potential return, such as stocks. (And, of course, a greater chance of losing money.)
I would steer clear of both spending and risk when it comes to your safe savings. I’d save and I’d keep the money in secure investments like savings accounts, CDs, and Treasury bills. This isn’t a brief against stocks. It’s that the money that goes into stocks should be earmarked for the riskier parts of your portfolio.
When it comes to your safe savings you want the money to be there when you need it, either to pay for an emergency or to take advantage of an opportunity.
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