By JEN WIECZNER
Saving has never been less rewarding. Interest rates on basic savings accounts haven't crossed 1% in more than a decade, with the average currently yielding just 0.08%, according to the FDIC. That means a $10,000 deposit would earn a measly $8 after one year in the bank. Money market accounts, which yield just 0.12%, are little better.
These dismal incentives to save are unlikely to improve anytime soon, as the Federal Reserve pledges to keep rates near zero through the middle of 2015. And since interest rates on many savings accounts no longer even keep pace with inflation -- currently about 1.7% -- some frugal Americans might wonder whether saving is now a losing proposition.
Ironically, despite the low-rate climate, Americans are saving more than 4% of their disposable income, according to the Bureau of Economic Analysis. That's more than they squirreled away during the higher-interest years after the turn of the millennium, and about twice as much as they saved in much of 2007. Even though saving is always a good idea, and financial advisers like to point out that one is better off putting cash in the bank than under a mattress, the current low-interest rate environment means that now may be the best time to put that money to work in other ways.
However, the interest an account earns shouldn't be the only consideration, since collecting a few extra pennies in a low-rate environment can come at the cost of keeping cash liquid and accessible. Certificates of deposit with terms longer than a year pay slightly higher interest, for example, but financial advisers recommend against them because they won't earn more if the Fed raises rates earlier than expected. "The last thing you want to do is be reaching for just a hair more yield now and be locked into something that you can't just adjust quickly if interest rates do go up," says Dave Abate, an Ohio-based financial planner with Strategic Wealth Partners.
But savings can be invested for potentially higher returns or used to cross a few financial goals off one's list. Here are five strategies.
Invest in Stocks
The Fed's intention to keep interest rates low for the next few years is only one prong in its strategy announced this month to stimulate the economy. The Fed's bond-buying program, known as quantitative easing, or QE3, is designed to promote growth at companies, and many economists believe stock market investors should benefit as a result. Rather than betting on specific companies, especially amid persistent market uncertainty, experts recommend investing in index funds that track a particular sector or include a large basket of stocks to create a composite of the broad market. One of the broadest market indexes, the Wilshire 5000 Total Market Index, which tracks the performance of U.S. stocks, has returned nearly 31% in the last year, or $3,100 on a $10,000 investment.
Buy a Car
Interest rates on auto loans fell to record lows in August, according to Bankrate.com, with a 60-month loan on a new car currently being offered at 4.37% on average, compared with 7.72% this time in 2007. For consumers considering purchasing a car it may pay to finance: A consumer financing $25,500 of a new car purchase would now pay about $474 per month, or $40 a month less (and $480 less annually) than they would have paid at the 2007 rate.
Refinance (and Pay Down) Your Debt
One of the best ways to take advantage of low interest rates is to renegotiate existing loans and pay down any debt on which you're still paying high rates, like credit cards, says Mark Witte, a senior economics lecturer at Northwestern University. With the average rate on a 30-year fixed mortgage hovering near its all-time bottom at 3.81%, according to Bankrate.com, experts say homeowners should find out how low they can go. For the average home costing $187,400, assuming a 10% down payment, mortgage payments on the remaining $168,660 would cost about $787 per month, compared with the $1,046 the homeowner would pay at the average rate this time in 2007 a savings of nearly 25%. Financial planners suggest that homeowners use the extra cash to pay down any outstanding debt.
To earn slightly higher interest rates while keeping cash available, Pennsylvania-based financial planner Nick Olesen recommends local credit unions or an online savings account. Without the overhead costs of a brick-and-mortar bank, online accounts are able to pay higher rates than the traditional savings account. But, cautions Abate, savers need to research these accounts before handing over any money, and look for reputable institutions: American Express Bank, for one, is currently offering a .90% yield on a savings account, or $90 on a $10,000 account, compared to the average $8 for a typical savings account.
Bank on Bonds
Some corporate and municipal bonds pay higher rates than federal government debt, so financial planners recommend looking for highly rated, short-term bonds and bond funds that provide a slightly higher return than their Treasury counterparts. For yields exceeding 2%, Olesen likes munis that mature in less than three years and have at least an A+ rating, but recommends steering clear of any municipalities that have recently defaulted, including places in California, Nevada, Florida, Puerto Rico, and the US Virgin Islands. A 3-year municipal bond with a yield of 2.2% would pay $220 after taxes (for an investor in the 25% tax bracket) on a $10,000 account. To hedge against that default risk, Abate prefers funds made up of corporate bonds, such as the PIMCO Low Duration Fund, which returned 5.34% over the last year, or $534 on a $10,000 investment. As a general rule with bond investing now, "Keep your duration short so you can remain nimble and be able to react quickly when the interest rates do start to pick back up," says Abate.