We sold our house to get rid of the credit card debt we had when my husband lost his job as a visiting professor after his department was downsized. We have $ 100,000 left after paying 75% of the debt.
How can we make some money with this safe money? It’s in a savings account to keep it safe, but not to generate interest.
I remember the days when you put your money in a High yield savings account and earn 2% or 3% interest. There’s a good reason I still remember those days. I am referring to 2019.
Then … well, COVID-19. To boost the economic recovery, the Fed cut interest rates to near zero. Now you are lucky enough to get 0.7% or 0.8% APY on your savings account.
The Fed is likely to keep rates near zero until at least 2023. That means the next few years will be great for borrowers and bad for savers.
So how can you safely make money with your money? Well, it depends on how you define the word “safe”. In particular, it depends on the type of risk that you can accept and are fair How Much Risk Can You Tolerate?.
Unfortunately, risk is inevitable – even if you avoid it risky investments.
There is no chance of losing any money staying in a savings account as it can deposit up to $ 250,000 FDIC insured. Even if your bank breaks down, the FDIC will step in to make sure you get your money back. Same goes for funds that you put into one Money market account or CD.
Treasuries are also considered to be the safest investments on the planet. You are backed by the full faith and creditworthiness of the US government, which means your money will be safe if the federal government does not default on payments for the first time in history.
Any of the above options would be a safe place to park your money without risking your capital. They pose a different risk, however: with interest rates this low, they won’t pay you enough to keep up with inflation. Technically, your money will still be there. But as the cost of living increases, that money will be worth less and less.
Until interest rates finally rise, I see no way to avoid a loss of purchasing power without at least risking an amount of capital.
That doesn’t mean you have to get all of your savings public. But would you be happy with the risk of, say, 20% investing in stocks and keeping the rest in the savings account or CD that pays the best (or least horrible) interest rate?
They don’t tell you how close you are to retirement or if you are already retired. Of course, that makes a big difference here. If you want to work a few more decades, I would recommend investing a lot more, albeit three to six months Emergency fund is still important. If you’re already retired I’ll stick to 20%, or maybe even less.
Investing in stocks doesn’t have to be risky, especially if you are willing to invest the money even if the market is turned upside down. The best way for most people invest in stocks is easy with an S&P 500 Index fundswho will give you one right away diversified portfolio.
Yes, you lose money when stocks fill up. Suppose you invest 20% in stocks and the market falls 20%. Your loss would be 4% of your portfolio and it is highly unlikely to be permanent. Shares have historically rallied after crashes. The S&P achieves an average annual return of around 7% after inflation year on year.
A commonly cited rule is that for the next five years you shouldn’t be investing money that you are likely to need. Stocks take time to recover when they fall. Because of this, people nearing retirement often shift assets from stocks to bonds and cash equivalents like CDs.
Unfortunately, the historically low interest rates combined with the volatility of the stock market in 2020 will represent a double blow for retirees: With fewer options for fixed income, many seniors have to choose between the risk of money in the stock market and the loss of purchasing power.
If you think you will need your money sooner or are unfamiliar with the risks of the stock market, you have to accept the compromise that your money is likely to lose purchasing power
One final thought, you still have credit card debt and credit cards averaged 16% interest. That means that for every $ 100 you cash out, you save yourself $ 16. That’s a guaranteed return of 16%.
Focus on paying back this balance so you don’t lose money on interest expenses. Then you can decide how to make money with your savings and how much risk you are happy to take.
Robin Hartill is a certified financial planner and senior editor at The Penny Hoarder. Send your tricky money questions to [email protected]
This article originally appeared on www.thepennyhoarder.com