When I was a kid, my father preached the magic of saving and compound interest. “Saving is earning”, he used to say. I saved part of my allowance, along with money that I earned, and opened a savings account at Bryn Mawr Trust. That “saving is earning” philosophy continued into my banking career, and continues today.
Suze Ormond recently wrote an article for AARP magazine and talked about the financial benefits of saving and investing. You keep your auto after paying off the auto loan, and instead of trading in for a new car with new loan payments, you invest that money. If you earn a 5% compounded return, at the end of 6 years you would have an extra $50,000.
The problem with this philosophy today is that with the low interest rate environment, there is no magic of compounding. It used to be that retirees and others could open a savings account or a bank CD and earn 3, 4, 5%, without risk. This supplemented their income each month; but not anymore. There is still a Bryn Mawr Trust and they still offer a savings account, but the current rate is .05%. That’s not half a percent; that is five hundredths of a percent.
Over the last 30 years, emphasis has moved from encouraging savings to encouraging borrowing. Loan interest paid is mostly tax deductible. Credit cards are easy to get; small business loans are more available than ever before. In economics, we learned that banks can create money by making loans. I have my money in a savings account, and when the bank lends it out, that person has the money as well, doubling it, which supports economic growth. Lower interest rates in general do help the economy, although I don’t think that the current ultra-low rates really help more than the low rates that preceded them.
There used to be other opportunities for savers to earn better returns without getting into the stock market. Savings accounts, savings bonds, CDs and tax free bonds offered the saver a decent return. Much of the attractiveness of tax frees was phased out by the tax act of 1986.
I don’t know if the Federal Reserve takes into consideration the small saver. With interest rates so low, the only choices are to earn almost nothing with money in the bank, or to go into the stock market. Recent events have shown how volatile that can be. In the long haul, the stock market goes up, but stock investing is not suitable for lots of people. People who are reluctant – as they should be – about going into the market, are easy prey for the charlatans offering “worry free” investments that turn out to be illiquid, and have fees.
I don’t know if the Fed considers “big” savers? Pension funds and insurance companies need to be conservative with their investments, which is not compatible with stock markets. If they can’t earn decent returns, pension funds will be underfunded. Insurance companies will have to raise premiums.
With all the support for the economy and workers these days, why not bring back a savings account or a “Coronavirus Bond” for low income savers, where a decent risk-free return can be had, and subsidize it to say 3% for up to $25,000? With all the other subsidizing the government has done lately, what’s a few more bucks?
It would set young savers on the right path, and help seniors and retirees. I hear from my assistant, whose daughter is a teenager that most young people today don’t think about saving- only spending.
With all the bright minds, perhaps they can come up with a product or way of de-risking investment and increasing return for the little guys without subsidy. I used to say in the banking business, we don’t have to be superstars, and do better than everyone else; an ordinary return is OK, just as long as we don’t screw up.
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