Do banks really want your money?

Do banks really want your money?

Outside of Putin's war on Ukraine, inflation and the prospect of rising interest rates are the primary focus of today's news cycle, and of our collective conscience. It's hard to go anywhere and avoid small talk that revolves around either subject — and for good reason. Indeed, gas has just hit a national average of $4.173 per gallon¹ (a record high) and the Federal Open Market Committee meets again this coming week to discuss raising rates again², which would make the cost of borrowing more onerous. New mortgages, car loans, and existing credit card debt become more expensive with higher rates, meaning that, although we're still in an historically low-rate environment, families will be able to afford slightly less home or car than they could during the last two years of the pandemic.

Although interest rates have already been ticking up, though, they're not going up fast enough for net savers to keep pace with inflation, which clocked in at 7% last year. Folks who've been stockpiling cash understand the struggle and shouldn't expect it to change any time soon. The average savings account today yields a paltry 0.06% in annual interest. Even if you opt for an online high yield savings account, you'd be lucky to get 0.65% a year. To put that in real dollar terms, if you had $10,000 in savings, you'd only earn $6/year in your average savings account and — maybe — $65 in an online account such as Ally, Vio, or Affirm. In 2021, you would have "safely" lost 6.94% in purchasing power. That same $10,000 at the beginning of the year would effectively be worth $9,306 at the end when you go to the grocery store or buy a used car and go to fill it up.

Generally, savings rates increase as interest rates do. But this divergence is likely the intent of Fed policy rather than a side effect of it. With cash savings at all-time highs and investors continuing to save at the bank, keeping savings rates unattractive relative to equities is a sly way of encouraging people to continue spending their money — either on goods and services as we wind out of the Covid-19 pandemic or on stocks, thus continuing to strengthen the domestic economy and buoy equity valuations.

So what does the savvy investor do given this backdrop?

• Stay calm despite the noise. Selling out of fear often serves to lock in losses and set you farther back from your long-term goals, rather than riding out the near-term volatility.

• The S&P is down almost 12% year-to-date and the Nasdaq has entered correction territory, off from its all-time high in November, but the domestic economy remains strong and, if anything, this likely presents some meaningful buying opportunities in the coming weeks. Look for quality companies with strong cash flow, cash reserves, and wide economic moats that can weather the geopolitical and Fed policy storms.

• Review with your financial advisor how much cash to leave in savings vs. putting to work for you. It's important to strike a balance between what helps you sleep better at night and what, in purely rational terms, will help you meet your financial goals.

• If you do have excess cash reserves, consider buying the dip with a dollar-cost averaging strategy!

• With the cash you decide to leave in reserve, consider looking at an online high yield savings account to at least eke out a little more APY.

Source:

¹ https://apple.news/Apz4Ptxm7SI2RTTLPb_TDbA

² https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm