Squirreling away your savings

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The Washington Post

By:  Michelle Singletary

October 4, 2012

 

There was a time when the American savings rate was pitifully low. Then the recession hit. People realized they needed a cushion, and they started saving again, pouring $6.9 trillion into savings accounts even though interest rates are at historic lows, according to recent Federal Reserve data.

As The Washington Post's Danielle Douglas reported this week: "The savings rate, which was at 1 percent in 2005, generally fluctuated between 5 percent and 6 percent during the recent recession. This year it has hovered around 4 percent, still above historical norms."

 

But squirreling your money into low-interest-paying savings accounts could hurt you in the long run. People who are stashing their cash that way are missing out on the highs of the stock market and a recovering real estate sector, experts say.

 

"The rate on the 10-year Treasury bond has been well under 2 percent, and banks typically offer less than 1 percent in interest on savings accounts, not nearly enough to keep up with inflation, let alone build enough wealth for a child's college education or retirement," Douglas points out.

 

But, understandably, people don't have the stomach to take the risk involved in investing.

 

"People have lost their appetite for risk," says Karen Dynan, co-director of the economic studies program at the Brookings Institution. "They've been burned by the stock market. They've suffered through capital losses on their homes. And so they're hunkering down in what they view as the safest place to store money."

 

Douglas asks a great question: "Who could really blame Americans for their trepidation?"

 

"Many watched what little wealth they created through homeownership or retirement plans evaporate. That kind of devastation is enough to sour most people on investing, or at least make them more conservative in their choices," she writes.

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This page contains a single entry by CFED published on October 5, 2012 4:15 PM.

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