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Hey hon, what's this tiny deposit in our savings account?
- Oh, that's the interest payment
from our new high yield savings account.
- Are you sure? It's only 42 cents.
How is that high yield?
- Are you kidding me?
The return on this puppy is 16 times the national average.
We even had to qualify for this special account type.
But it takes money to make money, am I right?
- I thought this was how we planned to pay for our next car.
By my math, we'll hit our goal in about 140 years.
- (moaning) On the bright side,
by then we won't need a car,
and our great, great, great grandchildren can use it
to get a certified pre-owned teleporter instead.
(playful music)
- Finding a high yield place to park your money these days
kinda makes me feel like I'm back in middle school,
hunting for Carmen San Diego.
I see ads all the time for accounts promising high yields,
cash back, and tempting rewards.
But as soon as I start sorting through the clues
as to where these might be found,
the query seems to slip through my fingers.
Whether it's a money market account, CD, savings bond,
or even the old faithful savings account,
finding one that pays 1/2 a percent is a struggle.
And if you do track halfway decent one down,
there's always strings attached,
like only for a certain amount of deposits,
or only for a limited time.
Am I missing something?
- See, once upon a time safe, secure deposits at a bank
were a pretty solid investment.
In 1985, the year Philip was born,
you could purchase a six-month certificate of deposit
at your local bank branch,
and earn an average of 8.05% interest.
Ah, good old days, right?
Eh, sort of.
See, banks were paying higher interest rates, yes,
but they were also charging higher interest rates too.
The average rate on a 30 year fixed mortgage in 1985
was a jaw-dropping 11.85%. (people groaning)
- When you deposit your paycheck at a bank,
or even put it in a savings vehicle,
like a CD or savings account, it doesn't just sit there.
Thanks to a practice called Federal Reserve Banking,
bans can actually lend out 90% of your deposit, and they do
in the forms of mortgage loans,
small business loans, and credit cards,
any amount they charge above what they pay you
is profit for them.
The difference between
the 1985 savings account and mortgage rate?
3.8%, which is actually extremely close
to the difference today,
because as the Federal Reserve
raises or lowers interest rates,
it trickles down to everything.
- So if the difference between bank deposits and bank loans
are relatively the same now and then,
why does it matter what your investment pays?
One word, inflation.
The amount of interest you earn on bank deposits
is only half the equation.
The other half is how much
the cost of goods and services increases at the same time.
Back in the mid '80s, your six month CD
would pay you about 8%, and the prices of fanny packs,
and bottles of New Coke were increasing by about 3%.
- This is what economists call your real return,
your investment return after inflation.
A 5% real return is nothing to sniff at,
which explains why your grandpappy
might be bugging you about setting up your savings account.
Investments like savings bonds, and even savings accounts,
made perfect sense decades ago.
But today, with inflation around 2%,
and safe money paying close to zero,
you're looking at a negative real return.
Suddenly things like savings accounts and CDs
seem like the opposite of an investment.
- Now, before we get to what you've gotta do
to earn a respectable, real return,
let's spare a moment for the humble savings account.
Should you just toss the safe money investment of yesteryear
in the dumpster, along with those old CD ROMs
and GameBoy cartridges?
No, they still have an important place,
but that place has changed.
Savings accounts, CDs, money market accounts
aren't really a place to grow your money,
and likely won't be for the foreseeable future.
- But these accounts are the perfect place
to stash funds you expect to need in the short term,
think the next one to two years,
money to pay bills, your emergency fund or cash
for a major purchase are perfectly suited.
Sure, you can try to spend hours sleuthing out the best
high-yield savings accounts,
in every corner of the internet,
but the difference will be microscopic,
and could change in a moment's notice.
Personally, we've decided to just keep
all of our one-year money in a simple checking account.
Crazy, right?
- But what about savings you wanna build up
for the mid or long-term?
Where does that belong?
The reality is the only way to earn
a positive, real return today is going to involve some risk.
Being a crime fighting gumshoe
isn't a smooth ride all the time.
We're not talking about wild, speculative risks,
like picking individual stocks, or betting on crypto,
but something with mild variation
in the price, over time, known as volatility.
Financial planners might refer to this
as a moderately conservative investment.
- One option to consider is simply a bond index fund.
These investments are generally backed
by guaranteed government and corporate bonds,
and they pay a respectable interest rate,
at least more respectable than what your bank account pays.
One of the most popular bond index funds
has consistently grown between 4% and 5% per year,
over the last decade.
And while there is some fluctuation
and the price is dramatically lower than the stock market.
The volatility makes it inappropriate
for money you might need in the immediate future,
but could make sense for a goal a few years out.
- Another newly emerging option
is peer to peer lending platforms,
that effectively allow you to be the bank.
That's right, you can easily lend out your own money
to borrowers and pocket some of the profit margin yourself.
Companies like LendingClub, Prosper, and Funding Circle
allow you to lend out your money to consumers,
hoping to avoid banks, and you get paid the interest.
- Some pay you a flat interest rate, like 5%,
but you have to commit your money for a year.
Others allow you to pick lenders,
with higher or lower credit risk ratings,
and pay anywhere from 5% to the safest borrowers,
to 13% for the riskiest.
While these returns may be enticing,
it's important to remember that you run the risk
of paying penalties if you need the money
before your term is over, or your borrower may default,
leaving you with a loss.
- The bad news is that for millennials, and gen Z,
the days of cash savings as a real investment are long gone.
- The good news is that with some strategic risk,
and a bit of research, you can still grow your money
faster than inflation, without having to make wild gambles.
- [Both] And that's our "Two Cents."
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- [Julia] Thanks to our patrons
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- To hear more about bonds, and my Sean Connery impression,
check out our video, "Bond, Savings Bond."
(playful music)