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5 silver linings of low interest rates

Oct 19, 2011 | | Comments Comments Off

Today’s low interest rates are making life pretty miserable for retired folks on fixed incomes who are trying to live off their savings.

For those who don’t need to tap their savings yet, however, ultra-low interest rates have some hidden advantages. For example:

You can pay your bills early. I used to hoard the money I needed to pay big annual or semi-annual bills, such as property taxes and life insurance. I’d send in the payments at the last possible moment to squeeze as much interest from our savings as possible. Now, I don’t bother. As soon as I get the bills, I set up the electronic payments and hit the send button. Life’s a lot simpler this way.

You save time. Back when the average savings account paid less than 1%, while online banks paid 5% or more, it was worth doing a little research to find a great rate and to move your money around once in awhile. Now that the gap has narrowed so dramatically—the best online accounts pay about 1%, while the average savings account rate is around .25%–it’s hardly worth the bother unless you’ve got a substantial cash stash.

It’s easier to avoid fees. If you have some cash savings, you can avoid a lot of the silly fees your bank wants to levy—without having to worry about the opportunity cost of keeping your money in a non- or low-interest-paying account. If you have to park $2,500 in your accounts to avoid fees, it’s likely smart to do so, since you’d earn only about $2 a month on the money in a higher-rate online bank account. If you’re required to keep a five-figure balance to avoid fees, though, it may be worth finding a new bank.

There’s no reason to take a chance with money markets. If you still have cash in a money market mutual fund, check the rate you’re getting. It’s probably less than a quarter of a percentage point, and may be as little as a tenth of a point. Remember that money market funds aren’t FDIC insured, so you do have a risk of losing principal, however small. Here’s one of the rare instances where you get a better deal with a safer product—you’ll get a higher yield investing in CDs or an online bank.
It’s clearer that there are no truly “safe” investments. Back when rates were higher, it was tempting to just park money in higher-yield bank accounts rather than risk it in the stock market. The problem with that approach is that your money had no chance of beating inflation over time—your purchasing power was being eroded by inflation and taxes. Today, it’s pretty obvious that you aren’t going to beat or even keep up with inflation if you put all your money in “safe” investments. You need to take at least some risk to get the long-term growth you’ll need to beat rising costs.

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