Finding The Illusive 8% Savings Rate

Stacy, I enjoy your tips, sometimes, but–really where have you been getting the 8% you are always mentioning where to stash the savings from manicure & dinner out?????

I get this question often…in fact, over the 20 years I’ve been doing news and using this sample return in my news stories when discussing long-term savings, I must have gotten it 50 times. And I certainly understand why you’d ask…after all, these days earning 3 or 4% on insured savings is no easy task, much less 8%.

But if all you ever invest in is bank savings accounts…especially for your long-term savings (money you don’t need and can set aside for 5 years of more)…then you’re making a mistake. Over the last century or so, the stock market has returned closer to 10% per year: that’s why so many people go to so much hassle and endure the kind of markets we’re facing these days. I probably don’t have to tell you that the market won’t be doing anything like 10% this year: we’d be exceedingly lucky at this point to break even. But take it from someone who’s been doing this a long time: when it’s good, the stock market can be very good indeed. So here’s a rule of thumb you should consider: subtract your age from 100, then invest that amount in stocks. So if you’re 25 years old, the percentage of your long-term savings (notice I said “long-term”) that you should consider putting in stocks is 75%. If you’re 75 years old, 25%. Again, this is a rule of thumb and you should never do anything that makes you lose sleep. But since you asked where in the world I got 8%, now you know.

And so as not to sound vague when I say to invest in “the stock market” here’s what I’m talking about: an index fund, like the Vanguard S&P 500 Index fund, for example. Since its inception on September 1st, 1976, it’s average annual return has been 10.96%. (Note, however, that over the last five years it’s only averaged 5% per year…and this year, it’s down 24%! Now you see why stocks only make sense for long-term investing, and only for those who can handle the ups and downs.)

A couple more points: first, real estate can also return 8% or more. Depending on what part of the country you’re living in, this may also seem like a joke at present. But over time, that’s not at all unrealistic. When I graduated from college, my parents gave me a used Toyota. I sold it within a week and used the money as a down-payment on my first rental house: it costs $17,000. Years later I sold it for 31,000. Since then I’ve been investing off and on in real estate and I can absolutely guarantee you that I’ve earned far in excess of 8% on my money. Although there were times…the mid-80s and now come to mind…when real estate was horrible and I wished I’d never gone there.

(Btw, in case you’re wondering what I drove when I sold my Toyota to buy a house: I went to my credit union, borrowed a few grand and bought a classic car: a 1958 Triumph TR3. I drove that car for two years, then sold it for 2 thousand dollars more than I paid for it. That was in 1978, and to this day that’s still the only car I’ve ever borrowed money to buy.)

And here’s a final point: interest rates on savings have been so low for so long that many people…especially those under 35…have forgotten they can go also go higher…much higher. When I became a stock broker back in the early 80s, money market accounts were paying 17% and zero-risk T-bills were paying 15%. Heck, you could even get AAA-rated tax-free bonds that paid 13%. So just because savings rates suck nowadays doesn’t mean they can’t go up over the long term. What could make interest rates rise? Well, let’s see…if inflation goes up…say because food and fuel prices soar…that could do it. Or if the government prints money…say to finance a war or bail out banks…that could also do the trick. Remember: you heard it here first.

So there’s a long answer to your short question. Where can you earn 8%? Lots of places if you’re willing to take a measured amount of risk. And sometimes even with no risk…just not at this point. Stay tuned.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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