There’s been so much bad economic news lately, we are thrilled to report some GOOD news for a change! Americans are saving again—aggressively. According to economic research data from the U.S. Bureau of Economic Analysis, the U.S. savings rate is at a 39-year high! The March 2020 personal savings rate was 13.1 percent—a rate not seen since 1981, during the Reagan years.
U.S. incomes are down overall. The government also reported that incomes dropped 2 percent in March due to the virus response. (Of course, people are not affected equally by this drop. Some people have seen incomes or business revenue vanish while others have been unaffected.) Spending has fallen much further—7.5 percent in March. Credit card usage has declined as well.
The 13.1 percent savings rate represents a huge jump from February’s 8 percent in February and an acceleration of an upward savings trend. The U.S. personal savings rate bottomed out at a dismal 2.2 percent in July of 2005 and remained below 4.5 percent until the Great Recession motivated better savings habits. In recent years, the savings rate has been steadily inching up, perhaps in anticipation of the next market crash or recession.
Unfortunately, sluggish spending slows the economy and challenges hopes of a speedy recovery. But there’s a big silver lining: that of personal economic stability. As we reported recently in The Great American Debt Addiction, spending is not a good thing if people—or corporations—cannot afford to spend! And when consumer spending racks up consumer debt—especially high interest consumer debt—it’s a warning sign. Mile-long food bank lines, unpaid rents, and the stress of wondering if the money will run out are other warning signs that could have been prevented by saving more.
Now let’s look at how to maximize your savings!
How Much Should You Save?
If the recent weeks of the lockdown prove anything, it is that people can save when they are motivated to do so! Even when incomes decrease, people can increase their savings rate. Simple changes of habit such as cooking at home and shopping less help you save more.
How much you save depends to some extent on your income, current expenses, and goals. Ideally, you will save between 10 and 20 percent of income.
Of course, more is better when it comes to saving. How much you save may depend on many factors. If you know you have “catching up” to do, try to save 20 percent or more. Some couples have been known to live on one income and save the second, which is a fantastic strategy!
Where to Save Your Money
What’s the best place to store your cash—a bank? A life insurance policy? Money market account? Your mattress?
When looking for the best places to keep your cash, it’s important to understand your time frame and intention with the money. You’ll also want to make sure your chosen financial vehicle meets certain requirements. At minimum, a cash savings vehicle should be:
- safe and secure
- accessible when needed
- affordable (not drained by monthly fees)
- tax and penalty-free to access, and
- earning interest to combat the effects of inflation.
Savings should never be subjected to stock market volatility, risk of loss, and/or qualified retirement account rules and penalties. Ideally, you will have both savings and investments. But always start with savings!
Let’s look at common savings vehicles and understand the pros and cons. Keep in mind, you’ll likely need multiple solutions, depending on how soon you’d like access to your money.
Treasury Bills and Bonds
Treasury bills (aka T-bills) is a short term security (less than 52 weeks) issued by the government. They function similarly to a very short term bond.
Treasury bonds (aka T-bonds) are long-term government bonds, available for 10, 20 and 30 years. They pay interest twice a year and, like T-bills, are considered a safe haven.
In the current environment, we see little advantage to T-bills or T-bonds. You can obtain better rates at an online bank or (perhaps) a credit union if you shop around.
Money Market Funds and Accounts
Money market accounts and money market funds are actually two different things, although they are often confused because of similar names and features. Considered a safe place for cash, the rates can be competitive with bank savings, although many pay less. (Bank of America is currently paying only .01 percent—that’s not one percent, it’s one percent of one percent!)
Money market funds are purchased from investment brokerages and are not guaranteed, though considered conservative. Money market accounts are issued by banks and are typically FDIC insured.
In this volatile environment, we would not recommend money market funds. Money market accounts are fine for short-term savings.
Certificates of Deposit
Bank CDs are a popular solution for cash. The main advantage is that bank CDs typically pay more than savings accounts. Unfortunately, they still don’t pay very well, and the rates expire when the CD term ends. They do not offer the convenience or access of a savings account or any long-term benefits, so they are limited.
If you have cash that you wish to use in one to three years, bank CDs are an option, but they might not be the best option. You could be better off acting as a private lender at a higher interest rate. If you decide to use a bank CD, it is worth shopping around as the most competitive banks can pay 10x the interest rate of some of the big banks!
A Bank or Credit Union Savings Account
The big advantage of bank accounts is convenience. You need a way to conduct everyday transactions with debit cards, ATMs, and checks, and a local bank or an online bank or credit union is one solution.
Affordability can vary. Many banks waive monthly fees if you do direct deposit or maintain a minimum balance. If you are currently paying a fee for a bank account, shop around. Bank fees create an unnecessary drain on savings!
You can find high-yield savings accounts available through online banking institutions and credit unions such as Ally, Discover, or Alliant. Local banks and credit unions can be competitive as well. Look for a high yield account with higher rates—about 1.20% as of this writing—with no fees or minimums. You can then use Zelle, Venmo, or transfers to move savings into your checking account as needed.
Even if you wish to have your checking account elsewhere for continuity or convenience, please do NOT keep your savings at a dismal near-zero rate at a major bank! Wells Fargo, Bank of America, etc. are paying depressing rates. You’ll earn a whopping .01%. That’s not one percent—it’s 1% of 1%! (Oh, and those extra pennies you earn will be taxable.)
There are potentially many issues with banks that we have covered in other articles such as “Bank (In)Security: 3 Reasons Banks Aren’t As Safe As You Think.” For the purpose of this article, we will just give you the “bottom line”: by all means, utilize a bank or credit union for your everyday shopping and bill-paying, for the sake of convenience and ease of tracking. However, watch your fees, be aware of potential risks, and realize that banks are not a good long-term solution for growing and storing large amounts of cash. (See below for a comparison of bank savings with whole life insurance—our favorite long-term cash solution.)
Life Insurance Cash Value
As a long-term savings strategy, whole life insurance policy provides compelling benefits over the typical cash vehicles above.
Life insurance cash value is a safe money asset that allows your savings to keep pace with or even exceed inflation. Over time, we see policies reflecting growth rates of about 3-5%, depending on factors such as age and health of the insured. (In past decades when higher interest rates prevailed, we saw growth rates of 8% or higher, so the rate environment is low right now everywhere.) Cash value is contractually guaranteed to grow each year, and for over 150 years, mutual insurance companies have additionally paid dividends every single year.
As far as safety, highly-rated life insurance companies are well capitalized, compared with banks, which only have to keep a small portion of their deposits on hand. (See “How Liquid Is the Life Insurance Industry?”)
What you won’t get is the convenience of checking accounts and such. There’s no ATM card—and also no security breaches. As whole life cash value is the liquid part of a life insurance contract, it functions differently than a bank account, with different advantages and disadvantages. In our family, we use BOTH—a bank for short-term savings and convenience, and whole life policies for all our long-term savings.
The chart below offers a comparison of saving in a bank versus saving with life insurance:
The Biggest Savings Mistake to Avoid
The biggest savings mistake is to not make saving a PRIORITY! Many people either don’t save enough or do not save consistently. They wait to see “what is leftover” at the end of the month rather than committing to saving FIRST.
This is one reason why we strongly recommend whole life insurance for your long-term savings. It is a “savings account that shows up like a bill!” Bills get paid first—so you SAVE first! (And don’t worry, there are many ways to temporarily decrease or even halt premium payments if necessary—without losing your policy.)
Using whole life insurance as a savings vehicle ads many advantages, such as
- a higher long-term growth rate
- tax deferral (proceeds are almost always tax-free when you keep the policy in force)
- death benefit
- living benefits
- and a structure for consistent savings.
Whole life insurance is a product that has stood the test of time and one that provides confidence in an uncertain world. As we face a recession and long economic recovery, now is the perfect time to begin a long-term savings vehicle with higher growth, additional benefits and a track record of superior results.
Reach out to Partners for Prosperity for a quote in the form of an illustration to see how a policy might perform for you. We’ll show you the “bare minimum” guarantees plus how the policy would perform at the current dividend rate. Although dividends are not guaranteed, mutual whole life insurance companies have paid dividends for more than 150 years in EVERY economic environment. It’s where we keep our savings and we love sharing the benefits of life insurance as a savings vehicle with others!
To learn more about whole life insurance, read “Whole Life Insurance: A Firm Financial Foundation.”
—By Kim Butler and Kate Phillips