The Federal Reserve announced plans to extend its "easy money" policy -- keeping interest rates at near zero levels in an effort to stimulate the economy. The effects of this policy can be seen and heard almost everyday -- on TV, radio, and in magazine ads. Interest rates are at the lowest levels this country has seen in the last 50 years--hovering near zero--in the hopes that consumers will buy and spend to support an overall economic recovery. What you don't hear frequently discussed is the 'flip side' of the story on long terms of low interest rates. The impact that these policies have on personal economics for individuals who have been struggling to maintain or improve their income and save money are understated. The interest rate tactics the Fed put in place are designed to encourage consumers to spend more, buy more, borrow more and increase debt. They call it a stimulus, but for the average consumer it can derail growth in saving money and may land you in a personal financial ditch once you consider all of the facts. So who exactly is getting stimulated by these policies?
When interest rates are low, not only does that impact the cost of money you borrow, but it can deflate money you are trying to save and grow. If you look up interest rates on basic savings accounts, Certificates of Deposit (CD's) or Money Market's at your bank today, you might be surprised to see they at or close to zero. Meaning, you are getting no growth on these savings vehicles. To add salt to this wound, the Fed also confirmed in its policy statement this week that the rate of inflation will remain "tame", at 1.3% to 1.7% this year and up to 2% through 2015, almost double what you can earn on your money in interest. Simply put: not only do consumers get to save less, but everything is going to cost more than one can save.
Recent consumer spending and saving research reveals fundamental issues in consumer financial health. The majority of households in the U.S. don't have sufficient emergency funds in savings if an unexpected event occurs. 40% of Americans have no meaningful retirement savings. Then pile on unemployment and underemployment with pending furloughs, sequestration cut backs, and income tax increases and it appears this might be the worst time for consumers to take on new debt, even at low rates.
It's not all ugly
If you must borrow money, or if you are in a situation where you have prepared, saved and are ready to make a big purchase--like buying a home--you benefit greatly from borrowing money at low rates. The ability to get into long term commitments at a very low rate of interest is a great position to be in. This can also be a benefit if you already carry debt at higher rates. Refinancing now is worth serious research and consideration, especially if you have a solid credit history. This is where the Fed moves really help consumers, if you are able to get access to credit. For the vast majority of people, like baby boomers, recent college graduates, new families just starting out -- the opportunity to get full benefit from 'easy money' policies comes at a cost. Consumers need to be extra smart and cautious in spending and borrowing money when it has become so hard to earn, keep and grow.
How do you get ahead if you are trying to save money:
1. Don't give your money away by taking on more debt. Running up credit cards or taking out personal loans gets costly over time. Every time you sign up to pay someone else with interest, you are ruining your possibilities for saving any real money. If you have any income, do all you can to keep it. Don't give it away with interest.
2. Consider paying off or refinancing high interest rate debt. In this current low interest rate environment, if you are being charged high rates of interest you should be looking for a way out. Review all of your loans to see if you pay more than a 6% interest rate (as a starting point). Then figure out how you can work with your lender to refinance and take advantage of a lower rate. If you have bad credit, this is a tougher proposition. If you have received or are expecting an income tax return, think about paying off or trimming down high interest debt with that refund. This is an indirect way of saving money long term and seeing more stay in your pocket.
3. Learn to live with less stuff, indulge less. Consumers are wasting more money on cell phone plans, brand named goods and useless material items. Cable packages, in-home movie services, eating out - it all adds up. You don't really need this stuff, so consider getting rid of it, especially if you are directing money that can be saved to it. Spending is good for the economy, and you will naturally spend to ensure you have basic needs met -- food, water, shelter, and utilities. Don't sign up to give extra amounts of your hard earned money away. Figure out ways to keep it in your pocket.
4. Shop for higher rate of return on your savings. Basic savings accounts are not earning very much interest at all, so depending on how much money you have saved up, look at alternatives for investing so your money can actually work for you and grow. Looking at mutual funds and other investment vehicles may make sense. Building your retirement fund and maximizing any matching that your company may offer is extremely smart. At a minimum, shop rates on bank money market savings and try to get as high a rate of return as possible.
There are many people who will benefit from the moves the Fed is making to keep money cheap. But there is risk in the continued push to get consumers to take on more debt and not grow their personal savings and assets. Being informed and smart when it comes to your money is the first step to building a solid financial foundation. Not all things that sound good are good for you.
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