Hello Everyone! This week I am going to talk about saving. Some of my New Years resolutions for 2011 include personal savings goals. There are a lot of ways to save money and there is a lot to consider when choosing the right way to save. One of the big challenges for me is the mountain of student loans that I have as well as limited cash flow. Therefore I am stuck with the question of whether it is more important to aggressively pay down my loans or to save? While everyone's situation is different, here are some things to consider...
The first two things to consider are interest rates and liquidity. These two factors will help you get the right combinations debt reduction and savings. Today I am going to focus on interest rates.
Interest Rates: Make sure that you consider both the interest rates that you are paying on any debt, as well as the interest rates that you are making, or could be making on your savings. You probably know that interest rates are at extreme lows right now. This can be both good and bad. This is great if you are a home buyer and can secure a mortgage at less than 5%.
On a historical basis, mortgages are extremely cheap.. However if you want a "riskless" investment such as a CD or a savings account your money may only be making 25 basis points (there are 100 basis points in 1%, therefore 25 bp = 0.25%). The low interest rates that are being provided on CDs and savings accounts are definitely something to consider when choosing where you want to save.
Unfortunately there are no magic answers to the low interest rates on your savings. While there are places that you can earn higher returns, for example the S&P 500 was up over 12% in 2010, there are significantly more risks associated in investments that give higher returns (and potentially large losses, we all remember 2008!). To make the situation even trickier, credit card rates are not nearly as forgiving as mortgage rates, currently averaging right around 15%, and student loan rates averaging around 6%.
Tomorrow I will consider liquidity and then later this week, we will discuss some options for savings solutions based on interest rate, liquidity and cash flow needs.
Cheers,
B
*This blog is strictly informational. The views are my own, and you should contact a financial professional before making any decisions. I am not paid or in anyway endorsed for the content of this blog.
This is great. I appreciate the attention to plain english wording for those of us who know nothing about economic verbiage. Thank you for posting this first piece. It is exactly what I have been thinking long and hard about. Keep it up!
ReplyDelete