Ask Stacy: Interest Rates are Low — What’s a Saver to Do?

Welcome to “Ask Stacy,” a short video feature answering money questions submitted by readers and viewers. You can learn how to send in a question of your own below.

If you’re not typically a video watcher, give it a try. These videos are short and painless, and you’ll learn something valuable. But if you can’t deal with video, no problem: Just scroll down this page for the full transcript of the video, as well as some reader resources.

Today’s question is about earning more interest on our savings without taking more risk.

I’m sure glad I’m not retired yet. Other than Social Security, there’s no monthly check in my future, which means I’ve got to generate a lot of my retirement income from my savings — something hard to do when insured savings accounts are paying practically nothing.

What’s a saver to do? Here’s my advice.

For more information on this topic, check out “Earn More on Your Savings With This Strategy.” Then, check out our bank account comparisons here. There are also recommendations for lots of other financial products, from credit cards to cellphone plans in our Solutions Center. You’ll find a link to it at the top of every page of the site.

Got a question of your own to ask? Scroll down past the transcript.

Don’t want to watch? Here’s what I said in the video

Hello, everyone, and welcome to your money Q&A question of the day. I’m your host, Stacy Johnson. This question is brought to you by MoneyTalksNews.com. We’ve been serving up the best in personal finance news and advice since 1991.

Let’s get to today’s question. It comes from V. V says:

“What do you use for the money that is not in stocks? Bond interest rates are terrible. I have a real problem investing where the upside is nonexistent and the downside is both probable and major. So, where do you go with your money?”

If you’re not familiar with bonds, let me tell you how they work.

When interest rates are going down, bond prices are going up. When interest rates are going up — like they are now — bond prices are going down.

Imagine a seesaw. Interest rates up, bond prices down. Interest rates down, bond prices up. What we have now is a period of rising interest rates, and what V is expressing is a fear that money in bonds is going to become worth less because as market interest rates rise, bond values are going to go down. She’s asking me what she should do.

What I personally do in times like these, V, is basically put less in bonds and more in money market funds. I have a lot of money in the stock market, but I also have a lot of money basically in cash. True, money markets and bank savings have been paying virtually nothing the last few years. But now that interest rates are starting to rise — the 10-year bond is approaching 3 percent as I speak — money markets are starting to pay a little more.

I have a job and earn an income, so I’m not currently in need of the income that bonds produce. If you need the income, but are afraid of capital erosion, here’s another suggestion: Buy shorter-term bonds. Will the interest rates suck? Yes, they will, but it’s better than watching your principal go down when you invest in longer-term bonds. (Note: The longer the term of a bond, the more it will decline in value as interest rates rise.)

So, if I were a bond investor, what I would be doing is buying CDs, short-term bond fund or short-term bonds. Think T-bills, two-year CDs or the Vanguard Short-Term Bond Index Fund.

Third idea: If you need more income, create a bond ladder or use a barbell strategy. “Barbell” refers to having some money in really short-term bonds so you’ve always got something coming due, then having some in longer-term bonds or funds that pay higher rates. “Laddering” refers to having bonds in various maturities, like steps on a ladder, that accomplishes the same thing.

Final idea: Alternative investments. For example, peer-to-peer lending. You can go to a place like Lending Club and lend out money, which is essentially exactly what a bond investor or CD buyer is doing.

When you’re using peer-to-peer lending, you’re lending to individuals and they’re using the money for any number of purposes, from paying down debt to fixing up a home. But you won’t lend to a single person: too risky. You’ll lend a little to a whole bunch of different people. You can often collect more interest than by investing in bonds and loans are relatively short term. So, if you haven’t looked at that, V, take a look. You can read more about it here and you can check out peer-to-peer lenders in our Solutions Center.

Let’s close today as we usually do, with a financial quote. This one comes from Tennessee Williams.

“You can be young without money, but you can’t be old without it.”

Tennessee, you’ve got that right. Hey guys, make it a profitable day and meet me right here next time!

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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

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