Savings account interest rates offered by banks really suck. You would think that in the middle of a credit crisis, banks would raise their interest rates to provide an incentive to consumers to deposit more money in their savings accounts.
I’ll avoid the US government / FED Reserve rant this time.
In any case, you’ll be happy to hear that the only banks that offer around 2% are the ones that are about to fail. Who needs that drama, right? The frustrating part is that not too long ago, I was getting upwards of 5% interest in my savings account.
So, I’ve been pondering, and wondering, and yondering (shut up it rhymes) about what to do with my money. It just really doesn’t feel right to me to have it sitting in a .10% Bank of America savings account. What on earth does .10% buy anyway? I can’t even call someone who cares with that.
I know what you’re going to say; No! CDs offer shit rates too.
See the problem is that growing up we learn all about how to make money but very little about “how” to save money (other than to put it in a savings account). I mean seriously, where is the incentive to save when you’re saving at .10%.
In fact, the most important lessons of money management of all, those revolving around the open markets, were conveniently ignored because nobody knows about it and everyone is afraid of it. The markets are evil places where wealth is destroyed after all. *gasps in horror and shudders with fear*
Because the issue here is that the banks don’t need to offer competitive rates in order to increase their liquid balances because they get free money from you through your taxes, so we’ve got to find another fairly stable entity that will offer competitive rates.
Why, I am talking lending to the US Government of course. More specifically, I am talking about Treasury Inflation-Protected Securities (TIPS).
Even more specifically, I am talking about the Barclays TIPS Bond Fund (TIP) which has a Distribution Yield of 7.54% (5/14/2009). Yes that is correct; you are all being molested by inflation and you don’t even know it. Now the yield does fluctuate with inflation, but you’ll be happy know that inflation has been reliably there in the past, so you’ll average around 5%.
So we’ll go ahead and do some basic newbie math ignoring the effects a monthly compound increasing the principle using a $1000 balance.
This is Ally Bank, formerly known as GMAC Bank, a colossal failure of a bank (yield fluctuates with stupidity).
$10,000 (principle) * 2.25% (rate from ally bank) = $225.00 (interest)
And this is Barclays TIPS Bond Fund (TIP) running at an average of 5% (yield fluctuates with inflation).
$10,000 (principle) * 5% (made up rate from TIP) = $500.00 (interest)
Now I know what your next question will be. But what if the TIPS become worthless one day? Well, considering that they’re issued by the US Government, the same entity that issues your US Dollars, if the TIPS became worthless, so would your US Dollars and your pitiful 2% shitty bank yields. Buy gold instead then.
In conclusion, learn to manage your money.