Your BEST investment could be your savings account!
So, we know that in a recession, you are likely to lose value in stocks, and may not recover that value for a very long time. We also know that interest rates are near historic lows, which makes money markets practically worthless. The low interest rates can go up far more than they can go down, and you should know that bond values go down as interest rates ascend. What's left? Real estate? It's also clear that we are nowhere near the bottom of housing prices. Could a low-risk, reasonable-return investment be right under your nose?
Savings accounts were back!...briefly
A remarkable thing happened, even as interest rates fell to almost unimaginably low levels. Online savings accounts were born. The first of these was evidenced by those millions of orange ads you may have seen on the Internet, for ING Direct. While walk-in banks were paying (and continue to offer) nearly 0% ING was offering 4% or more. The only misgiving I had was that ING is not a U.S. firm, so I wasn't totally sure how safe my money would be. It seemed like a reasonable question, until the first U.S. bank created an online savings account paying real interest — Emigrant Direct. I signed up as soon as I saw it. I could actually get 5%, yes five percent, on my savings, just like in the good old days, and with basically zero risk. The only issue was that it could take a day or two to transfer funds between my local bank and EmigrantDirect.
And then...it got even better! Many of the mainstream banks started offering online savings accounts with meaningful interest rates. My own bank, Washington Mutual, started a 5.00% APY online savings account, and I signed up right away. Several other national banks now offer this service, while most banks continue to use your cash while returning next-to-nothing to you. With the Fed's January 2008 reduction of prime rates by 1.25%, this APY dropped to 4.00%. But this is risk-free, with zero expenses, and the full protection of the FDIC (up to $100,000).
Keep an eye on the banks!
Five percent didn't seem like much, but even if you keep only $1,000 in savings,
you could be literally throwing away $30 to $50 every year.
With my bank, at least, I can move any portion of that into my checking account
within seconds, not days. Unfortunately, these same
banks that were paying 5% are now paying under 1% -- and sometimes much less.
But the rates may increase at any time. If
you're willing to make at least 12 debit transactions per month, you might also
find a local credit union that will still pay 4%. If possible, use
the same bank as you use for direct deposit, checking, etc. Oh, and
read the fine print! When I wrote this, for example,
E-trade only paid the high interest on checking with over $5,000 in the account,
although there was no minimum for savings. Most credit unions, especially also require quirky things
like direct deposit of paychecks or use of their credit or debit cards.
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