“A lot more people are holding on to their cash,” Schwark Satyavolu, CEO of BillShrink, tells MainStreet. “People are scared about the future of the economy. They feel the need to have a rainy day fund.”
While a certain amount of trepidation is understandable, there are disadvantages to squirreling away all of your money in a bank vault. Generally speaking, Satyavolu says, consumers receive a rate of .5% to 1% on a basic savings account, a sad side effect of the bad economy that most individuals electing to bank their money already understand.
What they fail to consider, however, is inflation, the rise in prices of goods and services in an economy over a period of time. Currently, the inflation rate in the U.S. rests at 1.1%, down significantly from the 2.6% rate from earlier this year, and a long-term high of 3%.
Once you also deduct the money you pay on it in taxes each year, even those on the high end of the interest rate scale well below the rate of inflation. This means you can’t expect to make any money off of your savings account. In fact, Schwark points out, thanks to inflation, your money is going to be worth less six months to a year from now.
“You’re not going to get rich by saving right now,” Satyavolu says, before cautioning consumers against going on a spending spree. But “the goods you purchase will also depreciate in value.”
Fortunately, those who are interesting in making money off of their money are not without low-risk alternatives. MainStreet took a look at some of them.
Pay down your debt.
According to Satyavolu, individuals should use funds that they were planning to place in a savings account, first and foremost, to pay off any debt that they have incurred during the recession.
“Start from the account that has the highest interest rates and work your way down to those that have the lowest,” Schwark says, adding that even those who are not in dire straits should pay off low interest credit lines associated with large purchases, such as a mortgage or car loans. While paying down a debt is not an investment, consumers save extra dollars by avoiding the interest rates associated with lines of credit.
Put your money into tax-advantaged accounts.
If you are lucky enough to be completely debt-free, you should consider investing as much money as you can in tax-advantaged accounts. These include employer-sponsored 401(k) plans, which let individuals put money away for retirement; a 529 plan, which lets parents or other relatives save for a child’s college education; or even a health savings account, which lets individuals accumulate funds for health care costs and services.
All of these different options are tax-deferred, meaning you won’t pay taxes on the money that goes into the account, unless you take it out before the terms of your contract specify. For example, most 401(k) accounts cannot be accessed without a penalty until the account holder turns 59.
Oftentimes, people shy away from these accounts because they qualify as investments – the money doesn’t sit safely in a vault, waiting for you to claim it. Rather, it is invested into different mutual funds or various stock options. However, account holders can specify the level of risk you are willing to take with your money and, according to Schwark, you can save a significant amount of money through the tax deferment and long-term investment.
Consider investing in the stock market.
Those who can focus on long-term gains should consider getting into the stock market, since the poor economy has driven the prices of stocks so low. “If you can hold the stock for the next 10 years it’s a good time to buy,” Satyavolu explains.
While the stock market may seem daunting, prospective investors can check out this MainStreet article that contains some tips for beginners.
Buy municipal bonds.
A bond is a formal contract to repay borrowed money with interest at fixed intervals, except in this instance, you are the lender. A municipal bond, specifically, is essentially an IOU from your city or local government agency, which uses the funds to finance community projects, such as sewer construction or road repairs.
According to Satyavolu, bonds are a good option for cautious investors since you profit from the interest you receive and bonds are also exempt from federal income tax, and in many cases, state and local taxes as well.
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