Are You Saving All Wrong?

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Save Money Piggy Bank
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With saving interest rates so low on most accounts, you may be depressed each month when you look at your bank statement.  It was only about 5 years ago that you could easily earn upwards of 5% in a money market fund.  That just isn’t the case now.  But if you’re stuck at 0.50% or less, you’re probably saving all wrong.  Savings accounts and saving options have changed over the last few years.  Here are some thoughts on the new banking generation.

Are You Not Taking Advantage of Checking Account Bonuses?

The first thing to think about is using high yield checking accounts instead of just relying on a savings account.  Right now, the best “regular” savings account offer a rate of around 1%.   However, there are great deals on easy access savings accounts online that can can pay upwards of 2%, and some even as high as 3%. 

How can checking accounts offer this high of an interest rate?  The reason is that they require their users to do a lot of things that result in higher profitability for the bank.  They are banking on your business (get the joke?).

For example, to get the highest rates and bonuses, you usually have to have a direct deposit setup on the account, can only have a balance that meets certain requirements, must make a minimum amount of debit card purchases each month (usually 10 or more), and usually must sign up for online statements only (to save the bank costs).  However, these simple tasks may be very well worth the higher interest earned.

Are You Saving in US Dollars Only?

Another trend that has emerged over the last few years have been to save money in other currencies beyond the US Dollar.  The reason behind this trend is that you may be able to take advantage of currency fluctuations, which could boost your return.  On the flip side, you can also protect your savings from losing value by investing in foreign currencies as well.

There are a lot of banks that offer both checking and savings accounts in multiple currencies.  You can either opt to hold multiple currencies in one account, or you can move the whole account into a designated currency.

Are You Not Using Bonds?

Finally, you may want to invest in bonds rather than using a bank deposit which provide a much a higher interest rate. For example, Birmingham Midshires Savings is offering a whopping 1.9% right now! The reason is that bonds can provide financial security while at the same time providing the flexibility of a traditional investment vehicle.  When interest rates fall, bond prices usually rise as investors flock to safety.  If you had shifted out of your high-yield CDs and money markets and into bonds a few years ago, you would have been reaping the rewards today.

It is important that if you are going to use bonds as an alternative to savings accounts, you use individual bonds, and not bond mutual funds.  If you invest in an individual bond, you will always get your interest and principal at maturity (at least with a government bond). However, bond funds continually sell their underlying individual bonds, which could lead to price fluctuation and possibly losing value.  Plus, when interest rates do rise in the future, your bond fund will lose money as investors shift into new bonds with higher coupon rates.

So, if you are going to consider this alternative, make sure that you stick with individual government bonds or high grade municipal bonds.  Also, there are high grade foreign government bonds that can also be safe and attractive investments to protect your savings while boosting your returns.