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Time to Rethink Your Savings Strategy

If you’re like many Americans, chances are in recent years you have put saving on your back burner.

The personal savings rate across the nation dipped to 2.4 percent of disposable income earlier this year, the lowest rate since 2005, and that trend is certainly alive and well in Oregon.

The low savings rate sounds alarming. In context, though, it makes a bit more sense. Interest rates have been historically low for more than a decade, offering less incentive for savers. A recession no doubt took a significant bite out of many paychecks. And the stock market has been steadily gaining since 2009, offering better returns than any savings account.

That said, now is an excellent time to begin rethinking your savings strategy.

What's changing

The headwinds that have worked against savers for years appear to be waning. Interest rates have been slowly inching up, and the Federal Reserve has signaled that in all likelihood rates will continue to rise through at least this year. In addition, the stock market has shown increasing volatility. And the rate of inflation is showing signs of increasing.

For savers, this is welcome news.

While higher interest rates are suboptimal for borrowers, those who are in the habit of stashing away extra money welcome an uptick. The reason is simple: Higher rates produce better returns on investment. In addition, the relative calm of a guaranteed return on investment — a defining characteristic of most savings vehicles — is a bit more appealing when the stock market becomes less predictable. And most importantly, a strong savings portfolio can help mitigate the negative effects of inflation.

Where to start

Individually speaking, setting up a strong savings portfolio isn’t hard, but it does take a bit of planning. Setting goals is a good place to start:

  • Are you creating an emergency fund? A general rule of thumb is to keep the equivalent of between three months to nine months of expenses stashed away for a rainy day.
  • Are you saving up for a vacation, a child’s education, home-improvement project, or some other out-of-the-ordinary expense?

Setting goals should help a saver determine the best vehicle. But many — including an entire generation of young adults — have never seriously considered savings products beyond conventional savings accounts. Such savings accounts do offer easy access to funds, but most typically pay lower interest rates than some other basic saving vehicles. That makes conventional accounts ideal to stash away emergency cash, but less desirable for long-term savings.

Conventional accounts are ideal to stash away emergency cash... less desirable for long-term savings.

Alternate savings options

Money markets help with higher balances by offering higher interest rates, but if you drop below a specified balance, penalties may apply. Certificates of Deposits, also known as CDs or Share Certificates at credit unions, are better suited for long-term savings. CDs offer higher rates and fixed terms, and the longer the term, the higher the rate. The caveat is that penalties often apply for withdrawing funds early. (Saving for retirement is another matter, and you’d be best off seeking the advice of a financial advisor. Tools such as annuities offer tax benefits that need to be considered.)

Not understanding the full range of available savings vehicles is a mistake. Such products often offer higher interest rates than conventional savings accounts without increasing the near-zero risk associated with savings. And the restrictions on withdrawals on products such as CDs, for instance, can lessen the temptation to dip into savings, preserving what a saver has worked so hard to build.

The bottom line is that using safer, guaranteed-return savings vehicles can help savers achieve financial security and better weather any changes that will come.

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