Low interest rates have been a boon to borrowers in the U.S. Homeowners have been able to take advantage of cheap mortgage financing, and credit cards and auto loans have seen similarly attractive rates during the past few years. Yet savers have gotten the short end of the stick, as much of their income evaporated as investments like bank certificates of deposit and bonds have seen their yields plunge.
Even as signs have emerged that the Federal Reserve might provide some relief by boosting rates soon, you still need to take action now to make sure you get as much income as you can from your portfolio. Here are three tips you can use to try to make your money work as hard as it can for you.
1. You better shop around
Many savers never think to go beyond the bank that they already use for their checking accounts. Yet all too often, many of the major banks that work so hard to market to checking-account customers are the ones that pay the least attractive rates on products like savings accounts and bank CDs. In the current rate environment, it's not uncommon to find major banks paying as little as 0.01% to 0.05% on some of their savings products.
By contrast, if you're diligent, you can often find much better rates off the beaten path. Whether it's Internet-based banks that don't have the overhead costs of traditional financial institutions, or smaller banks and credit unions that cater more to a more localized community, taking the time to peruse savings products at other institutions can sometimes earn you as much as a full percentage point more in return. That isn't necessarily a huge benefit, but over time, it can add up to a substantial amount of money.
2. Climb the ladder.
If you're looking at bank CDs or bonds that involve locking up your savings for a given period of time, one thing you've probably already noticed is that the longer the term you pick, the higher the interest rate generally is. If you have enough money set aside in savings, you can take advantage of this fact by using what's known as a CD or bond ladder.
How a bond ladder works is that, instead of putting all your money into a short-term investment, you instead divide it into chunks. Some of the money goes into shorter-term CDs or bonds, while some of the other portions will go toward higher-rate long-term fixed-income investments. The idea is that, while you might need some access to your money on a short-term basis, you might be willing to put at least some of your savings aside for the long haul, and that can boost the overall interest rate you earn.
3. Take a little more risk.
Even by shopping the competition and using techniques like bond and CD laddering, many savers still haven't been able to get the income they need. In response, some have looked to the stock market, and the relatively healthy yields that many blue-chip dividend stocks currently offer.
It's critical to understand that moving money from cash and bonds into stocks isn't a decision you should take lightly. Bank CDs are guaranteed not to lose money as long as you stay below the $250,000 FDIC limits, but stocks can be volatile, and create risk to your investing principal.
Stocks also give you the potential to see your principal grow over time. If you have a long-enough time horizon for your overall financial needs, devoting at least a portion of your savings toward dividend-paying stocks isn't a bad move to make.
Low rates have been a nightmare for savers who rely on their investment portfolios to generate the income they need to cover their living expenses. By looking at these three simple ideas, though, you might be able to make your savings work a little harder for you.