I wanted to talk about saving money tonight. Specifically, how the government is waging a war on your ability to save money and build wealth. Most people first start to save by building up short term savings, a rainy day fund, emergency fund, etc… Currently, the gov’t is making this harder and harder by keeping short term interest rates too low. Ostensibly, its doing this to stimulate the economy. In the latest round of stimulation, since the previous attempts have failed, it is actually targeting the raising of inflation expectations so you will go out and spend more. I wish I was making this up. So, while debt and spending is what got us into the economic crisis the so-called fix is more of the same. Its enough to beat your head against a wall. More on this another time.
How bad is this war? Well, lets look at two things. The first chart shows the average 5 yr CD yield in the US. Data is from bankrate.com.
The 5 yr avg CD, even for accounts over $100,000, is yielding just over 1.6%. Well, how about gov’t bonds. The chart below shows the yield on gov’t bonds.
As of 10/15 you need to go out to the 7 yr treasury bond to get a yield greater than a 5 yr CD. But that is not the worst of it. These are nominal yields, before inflation. What about after inflation? The gov’t keeps track of this as well. Lets take a look at real yields in the chart below.
This is the shocking chart! You need to go out to 10 years to earn a positive rate of return after inflation. And that is not even taking taxes into account. If you’re trying to build up funds outside of retirement accounts you pay taxes on any interest from savings. And those taxes are on nominal interest rates. So, given that most people don’t save that much for retirement, I would come to the conclusion that the majority of savers are losing real money on their savings!
But what about the other side of the war? The savers that are being attacked? Can’t they just go out and find higher yielding vehicles or other investment products that make us money after inflation over the long term? Yeah, sure, if they knew what they were doing. But most people don’t know what they’re doing. I looked at a recent study from FINRA on US financial literacy. Here is what they found.
Note the last sentence. Less than 10% of respondents could answer all 10 questions correctly! These are basic questions. Take the test here for yourself. A well educated middle schooler should be able to answer these questions. How is this side going to even compete in this war? They can’t. They have zero chance.
I want to close this post out with two points:
- You need to take some risk to protect your wealth during this time. This could mean putting money into a corporate bond fund instead of a bank savings account. It could mean buying 7 yr or 10 yr US treasury notes. It depends on your situation and risk tolerance. But as I showed above, the ‘zero risk’ bank savings account, CD, or short term bonds is costing you your wealth.
- Get educated. Educate your family, friends, acquaintances, anyone you can. People need to learn about alternative savings and investment options to protect their wealth. We live in a complex asset based world wide economy. That is not going to change. If anything it is going to accelerate.