Photo (cc) by Images_of_Money
I got an email recently from a reader wondering how we could suggest it’s possible to earn 6 percent on a savings account. Maybe you read the same article or one like it and wondered the same thing. Here it is…
One of your subscribers sent me an article by Tara that included “if you save $200 a month with 6 percent interest you’ll have $200,000 in 30 years.” My friend asked me where you get 6% interest on “savings”, not some other investment vehicle.
I reviewed the article and found no answer to the question. Can you please advise? Thank you.
– Chuck, Oceanside CA
Here’s your answer, Chuck!
The article in question was a post called The Only 2 Financial Rules You Need Live By, written by Tara Struyk. What I think Chuck is assuming is that the word “savings” in this context is synonymous with “insured bank account.” If “savings” equals “insured savings,” he’s certainly right to challenge Tara’s math. I just looked at our savings search tool, and the highest rate I could find on a five-year CD was 2.2 percent – and that required a $100,000 deposit.
Wrong assumption, but point well taken
In my world, the word “savings” doesn’t mean “insured savings,” it means money you’ve, well, saved. Under that broader definition, you can certainly find investment vehicles that have returned an average of 6 percent or more over long periods of time. You don’t have to look far. Just go to my personal stock portfolio – other than the ones in my retirement plans, every stock I’ve bought over the last few years – and you’ll see my overall return is a heck of a lot better than 6 percent annually.
As I write this, my most recent purchase, Ford, has gained about 18 percent since I bought it just two months ago. (See Time to Take Ford for a Ride?) Another good example is ConocoPhillips. I bought my first 150 shares in March of 2009 for $35.20, and it now pays dividends of $2.64 per share. That’s a 7.5-percent return on dividends alone, and the stock has also doubled in value. (See 28 Ways to Save on Gas You Already Know, and Maybe One You Don’t.)
But let’s not just focus on the good. I’ve also put my hard-earned money into some major losers. The biggest is Bank of America, a stock that’s down more than 50 percent. I’m also behind the eight ball on Citicorp, Huntington Bancshares, and Corning.
Wealth without risk? Forget it.
Although not always with the same wording, I’ve received challenges like Chuck’s many times in the 20-plus years I’ve been been offering investment advice on TV and in print. And it’s a legitimate question. If you’re going to say things like “if you save $200 a month with 6-percent interest you’ll have $200,000 in 30 years,” then you should also offer a risk-free way to earn 6-percent interest for 30 years. Otherwise, how can the reader do what you’re advising?
Unfortunately, however, earning a decent, risk-free rate on your savings has never been less possible than it is today. Never in my lifetime have interest rates on insured investments like bank accounts or U.S. treasury bonds been lower. So how are you supposed to get ahead when prices are rising at 3 percent and you’re earning less than 1 percent? You’re not. With every day that passes, you’re losing purchasing power to inflation. And the longer it goes on, the more you lose. And the more you lose, the longer you work.
I wish there were a simple solution to this problem. After all, I’m no spring chicken, I’m not a daredevil, and I’m not so rich that losing 50 percent in a stock doesn’t matter. I don’t put my money at risk because I want to, I do it because I have to. The social security checks I’ll start getting 11 years from now won’t cover the property taxes on my house, and I don’t have a company retirement plan to fall back on. The only way I can get ahead is to take a measured amount of risk. That’s why I’ve spent most of my adult life trying to do it right.
Bottom line? While it’s possible to earn 6 percent on your savings, it’s not possible to do so without risk. Anyone who suggests otherwise is either a liar or a fool. But since taking on some level of risk may be the only way to accomplish your goals, reduce that risk by learning about, then considering, investments other than bank accounts.