I’m a saver, always have been. It has served me well over the years, eventually leading to my current position of financial freedom.
My grown kids are also savers and I have high hopes that the grandchildren will follow their example. To learn to live within your means is one of our primary family money values. Helping the parents teach my grandchildren to save is an ongoing project of mine.
Each year I bring them together in my Grandma Rie’s Money Camp and focus on different aspects of personal finance, with saving being a focus in each camp. As part of that, we have explored compound interest. I start a money jar out with a dollar and each day we ‘compound’ the interest on that to demonstrate the concept and encourage their proclivity towards saving. Because we only have a week to show results, and because savings account interest rates have been near zero each year since camps started, I have routinely given the jar 50% interest. As they get to keep the $1 principal and all the interest at the end of camp, they love the exercise of figuring out what interest to add each day.
Trepidation about having the grand-kids open a savings account.
Both are now old enough to open a bank savings account. Something I did around their age (one is 9 and the other 12). Back then I had a passbook. I would go into the bank with my stubby little hands clutching my months worth of allowance (total of $1), deposit it and see the results right off printed in my book. Nice immediate incentive. This was part of my parent’s plan to turn me into a saver.
I’ve been toying with the idea of getting their parent’s permission to have each of them open a savings account this year – to the same end as above. But, I wonder, will that work in today’s interest rate environment?
Why would they want to save their money to get pennies a year on their principal?
Who would? We have all despaired of ever again getting a decent return on our savings. Those of us who have been around awhile remember much higher rates – even up to 14% on CDs at one point. Why be a saver stooge?
Historically, rates now are close to the lowest since the mid-eighties and have stayed low for one of the longest stretches in recent history. Although we think of the Great Recession starting in early 2009, it wasn’t until 2013 that the 5 year CD interest rate fell below 1% – and has stayed there ever since according to Bank Rates interest survey data.
The FDIC shows the US national average payout for savings accounts less than $100,000 is .06%.
After all, what would they earn on that $100 each has saved up? Six measly cents. What can you even buy for $.06? Pretty much nothing. For them, it would be much more fun to do something else with their money. I’m sure lots of adults feel the very same way.
Financial moves in a low interest rate economy.
While the grand-kids savings account alternatives are slim – save in a piggy bank or buy that new toy, adults have a few other options.
Instead of saving, we can go ahead and spend on things we need or want. With low interest rates, we also have (at least theoretically) low inflation rates. Things will cost more in the future, getting them now could be a wise choice.
Of course, depending on what we buy, we may experience some buyers remorse. That lovely new car goes down in value each year; today’s fashion wear can’t be worn next year (at least in some people’s minds); that new iPhone will be obsolete very soon.
Instead of saving, we could take some bigger risks to try to grow our money. We could buy lottery tickets, put it on the table at the casino, or loan it out to someone else at a better interest rate than we can get at the bank.
But, with each of the above, you lose the use of that money and often have little chance of even getting it back, let alone making it grow.
We could take on debt to grow using other people’s money. Sure, we aren’t getting much money, but mortgage lenders are also experiencing the lowest rates in decades. Getting a 30 year loan now might be the smartest thing you could do financially. Getting a business loan to start and grow a company might also yield huge long tern financial results. Using a student loan to get educated or re-educated in a new (presumably higher paying) field could also be a sure thing.
However, taking on debt without the current ability to repay it can result in loss of down payment and years of debt interest payments.
Instead of using a savings account, we could put the money in the stock market.
Although typically a good option – if you have enough liquidity to weather market losses, this isn’t the best thing a person with no money saved up can do.
So, yes, there are other things to do with money that might be saved, so why save?
Why save money when interest rates are so low?
Risk tolerance can dictate you save.
You may not be comfortable doing more risky things with your money. If you are risk averse, you may lose sleep (and health) worrying about the safety of your finances.
Saving first can help you avoid usury interest rates.
Having that emergency fund to keep on paying for the utilities when you lose your job, or for buying the new furnace when the old one gives out may save you from using high interest debt, such as credit cards or title or payday loans to finance your day to day needs. Having the wherewithal to pay off any loans including credit card charges each month ups your credit rating, letting you enjoy lower rates on everything from insurance to mortgages.
Saving is a prerequisite to becoming an investor.
Investing requires financial backing. Although you could buy real estate and stocks or other investments before building that backing, what happens if you can’t make the mortgage payment, or have to sell the stocks at a loss to buy groceries or pay the rent? You lose.
Investing, rather than saving in ultra ‘secure’ places is (in my opinion):
- More lucrative
According to US NEWS
“Since 1926, the S&P 500 has produced an annualized total return (including capital gains and reinvested dividends) of 6.6 percent, after inflation. Those 86 years include the 1929-32 free-fall (when the Dow lost about 90 percent), the years just before World War II (when it fell by half), and the doldrums of 1966-81, when stocks were essentially flat.” (italics are mine)
Most of the time, the best we can expect from bank savings accounts has been from 2% to 5% before inflation.
- More fun.
Although it was fun as a kid to see my passbook updates, it is much more fun as an adult to actually invest in a company whose product is successful and with which I have an affinity. Seeing the stock price jump or watching the dividend and cap gain get paid out is very satisfying. Owning part of something is more interesting than lending money to a bank, in my mind.
- A better road to financial freedom.
To me, money in a CD or savings account has always been for specific shorter term goals. Money invested is there to stay – whether the investment is in a stock, a bond, a REIT, a building or something else. Because investing is longer term, more fun and higher yielding, it can generate more passive income – leading you down the path to financial freedom.
- Lastly, being a saver sets an example for your children (or grandchildren) to model.
Because I am a saver, I have now become financially free. Because I am a saver, I unconsciously and consciously model behavior for my children and grandchildren to follow. Because I have realized benefits from being a saver, I want my grandchildren to become savers. Because I truly believe that saving is valuable – even in a low interest rate environment- I will find a way to help them realize the value of saving. Besides, kids probably wouldn’t be impressed with ‘normal’ savings account interest rates either – compared to the other interesting uses for their money!
I’m sure that, when I explain that they will never get close to my Money Camp’s 50% compound interest on their money in real life and that the contrast between it and what they would get in a bank savings account is pretty stark, I will still encourage them to open an account – by offering other incentive – such as some kind of match your savings option.
Why are you a saver in a low interest rate environment?