In all the dismal economic data, I finally found something to be hopeful about: As unemployment rose and consumer confidence sank last year, the amount of money people saved moved steadily upward. I cheered as it climbed from 0.8 percent in April 2008 to 6.4 percent in May 2009. From August 2008 through August 2009, we collectively saved $5.6 trillion.
And the good news doesn’t stop there. I’m happy to tell you that my sources, with the exception of a few outliers, see low inflation on the horizon. “We anticipate inflation averaging about 2.5 percent a year over the next five years,” says Mark Zandi, chief economist at Moody’s Economy.com.
Suddenly we super-savers can ask the kind of financial question that’s fun to consider: What should we do with all our money?
Let’s start with what not to do with it. If, like many people, you’re saving for a time in the near future when you feel comfortable spending again, then don’t buy stocks. There is a big difference between money you’re putting away for the long term (for retirement, perhaps, a portion of which does belong in the stock market) and cash you are going to need in the next three to five years (to start a business, buy a car or pay a child’s college tuition). Short-term funds do not belong in stocks, because you can’t afford to lose money that you’ll need soon. And although the stock markets historically go up over decades, in the near term they are unpredictable, which means you don’t know where they will be when you need to withdraw.
Second, don’t put your short-term cache into savings accounts, money market accounts or traditional CDs. Balances sitting in basic checking or savings are pretty much earning you nothing, so keep only your emergency cushion in these accounts, for immediate access. The average interest rate on money market accounts today is a pathetic 0.1 percent. Even a two-year CD will net you only about 1.1 percent, on average. With payouts like these, you’ll lose money on your investment because taxes and inflation will eat away more than your entire return.
Here’s the math: Say you manage to find a one-year CD at 1.7 percent. You’ll lose about one third of the interest to taxes, which brings you to around 1.1 percent. With inflation expected to be around 2.5 percent, every dollar you have will lose that much in purchasing power each year. So even though you’re “earning” 1.1 percent after taxes, your real return is a negative 1.4 percent. A year down the road, $100 would buy you only $98.60 worth of stuff.
So where to stash your cash? The options below are meant to protect your principal and help your money grow.
High interest–bearing checking
Historically, interest-bearing checking accounts have been a big waste of time. Recently, though, some savvy financial companies have decided they can make money by offering you the chance to earn a little as well. These small to midsize banks have introduced checking accounts paying four percent in certain cases (sometimes more)—which is roughly 35 times what you can earn right now on an average checking or money market account.
Of course, there are many hoops to jump through. Take, for example, the checking account from Royal Banks of Missouri, available to anyone, anywhere, who is willing to access the account online. It’s paying 4.3 percent on balances of up to $24,999 and 1.4 percent on remaining balances above that maximum. There are no fees for the account, but you must buy something with your debit card at least 10 times a month (the bank makes its cash on the merchant fees from these transactions), make either one direct deposit into the account every month or one automatic payment out of it, and receive your statements online. If you don’t meet these rules, you earn 0.15 percent on the whole balance for that month. Because it is unlikely there’s a Royal Banks automated teller machine in your neighborhood, the account will reimburse $25 in ATM fees a month if you meet the requirements.