Better Late Than Never: Tips To Start Saving Now!

Better Late Than Never: Tips To Start Saving Now!

Savings or money market accounts may be a better investment right now than they were a few months ago.

There's no right or wrong answer when it comes to whether or not you should be saving money right now. It ultimately depends on your individual financial situation. However, if you can afford to do so, saving even a little bit of money each month can help you reach your long-term financial goals.

With the current economic climate, there is an increasing amount of uncertainty around whether saving money right now is a wise decision. In fact, many people may be wondering if they should even be trying to save anything at all. 

The good news is that it’s never too late to start saving — and in many cases, continuing to save money can be beneficial.

The past year or so has been difficult for both savings and investment. It's been challenging to find a secure place to store money because inflation is out of control and several major markets are in the correction zone. Bond yields have been below the rate of inflation, and interest rates on savings accounts have been pitiful. Against inflation, all money stored in cash or bonds has been losing purchasing value. This might be a concern for real estate investors who frequently need time to accumulate cash between transactions.

Fortunately, it appears that change is now taking hold. One benefit of recent rate increases is that they tend to increase bond yields and interest rates on savings and money market accounts as the Fed raises its federal funds rate. Exactly this is what we are observing. Now that inflation has been taken into account, these low-risk investments have the potential to provide real returns.

The last few months have seen a range of 3.5% to 4% in bond yields. High-yield savings and money market accounts currently provide between 3.3% and 4.3%, according to Bankrate.

Nominal vs. Real Returns

For a low-risk asset, earning between 3.5 and 4% is a respectable rate of return, but that nominal (not inflation-adjusted) yield does not account for inflation. We must consider the "actual" rate of return in order to determine whether these assets are a wise choice for investors. Real returns here refer to those that have been adjusted for inflation. For instance, your "real" return is actually -3% (4% - 7% = -3%) if inflation is 7% and the nominal rate of interest on a savings account is 4%.

It may appear like real yields on bonds and savings rates are still negative given the most recent inflation rate's 6.5% year-over-year rise rate, but that may not be the case. The Consumer Price Index (CPI), which is said to have increased by 6.5%, is a metric that looks backward. In other words, prices increased by 6.5% between December 2021 and December 2022. We learn nothing about what will occur in the upcoming year from it.

A Fall in Inflation

We can't predict what will happen in the upcoming year, but it can be useful to look at CPI increases from month to month rather than year to year. Our understanding of recent events is improved by month-over-month data, which unmistakably demonstrates a lowering of inflation.

Consumer Price Index By Percent Change (2012 – 2022) – St. Louis Federal Reserve

In the first half of 2022, inflation increased steadily from 0.5% to 1.3% monthly. Of course, this is really high. However, according to the most current report, monthly inflation actually fell by 0.1%. The year-over-year result will be below 1%, significantly below the Fed's objective, if inflation remains comparatively flat (as it has in recent months). You would earn roughly 2-3% on your money in comparison to a high-yield savings account's 3.5% interest rate.

But it would be unduly optimistic to anticipate a flat monthly rate continuing forward. Instead, let's use the last few months as an average. The average monthly inflation rate for those five months, if we look back to July 2022, when inflation began to slow, was 0.16%. If we extrapolate it for a year, we'll see an inflation rate of about 1.9% towards the end of 2023. This means that if your money were kept in a high-yield savings account, you'd still make a real (inflation-adjusted) return of around 1.7%.

Even if you predict that inflation will increase by 0.3% per month over the next year, it would still result in an annual rate of 3.9%, which is more than the Federal Reserve's target rate of 2%. The rate of return on bonds or a money market account would be about comparable.

Saving is more reasonable than ever before.

Of course, the real profits we're talking about are negligible and most definitely won't generate substantial wealth over time. But I believe that investors should take this into account when making their strategic decisions. Investors now have a secure location to deposit their money where they may at least maintain their purchasing power, if not modestly expand, for the first time in more than a year. Some were under pressure over the past year to make an investment with money to prevent it from depreciating due to inflation. Although it intentionally made poor choices to protect against inflation, it felt like a never-ending struggle to stay up with inflation. Now that it gets a small actual return on my money, It can wait patiently for the finest possibilities.

You should be aware that not all savings accounts are created equal. In this market that is stabilizing, there may likely be some fascinating possibilities, but seizing them requires perseverance and hard work. The potential to generate a genuine return while looking for the ideal long-term investments is made possible by having a reliable place to park your money.

JACOBS & CO. REAL ESTATE, LLC.

12923 Fitzwater Dr. Nokesville, VA 20155 

(703) 594-3800 | jacobsandco.com