Savings Accounts and Checking Accounts: The Least of All Evils?

Over the course of history, people have put their hard-earned savings into speculative investments such as tulip bulbs and South Sea trading companies, not to mention Ponzi schemes and doomed hedge funds. So perhaps the conservative savings choices of MoneyRates.com/GetRichSlowly.org readers are understandable.

But are those choices too conservative?

Poll Results: Savings Accounts and Checking Accounts on Top

A poll run jointly on MoneyRates.com and GetRichSlowly.org asked where site visitors were investing most of their savings these days. Out of 1,152 responses, the results were as follows:

• Stocks: 23%
• Fixed income investments/bonds: 7%
• Savings or checking accounts: 33%
• Diversified portfolios: 21%
• What savings?: 16%

With savings account rates and other bank rates at extremely low levels, such a conservative asset mix raises some concerns. However, given the baggage carried by both stocks and bonds in a still-shaky economy, perhaps going the conservative route is simply a matter of choosing the least of all evils.

No Great Place for Savings These Days

According to data from the Federal Reserve, bank rates have never been lower. Using 1-month CD rates as an example, they stood at 0.16% in the early part of this year, just a tiny fraction of their long-term average rate of 6.25%. By way of perspective, until last year those 1-month CD rates had never dropped below 1%.

Still, in the recent poll, this ugly duckling was the beauty contest winner. The reason may well be that the alternatives also have their share of warts.

Stocks, for example, have seen overall prices (based on the S&P 500 stock index) decline by 19% over the past decade. People generally like some reward to go with their risk, so a long stretch of losses really kills the appeal of stocks. Even though stocks have staged an impressive comeback over the past year, gaining more than 50% in the 12 months ending in February, that too might scare some people off. After a run like that, it would be natural to think that by now the best opportunity for a while has been missed.

Bonds also present a lackluster alternative. For instance, 10-year Treasury note yields hit a 50-year low at the end of 2008--and while they've bounced back somewhat, yields are still more than 40% below their long-term average.

Since diversified investments represent a blend of stocks and bonds, for many people they just represent a blend of those problems.

Implications for Savers

It is likely that different people have different reasons for putting an emphasis on deposit accounts. Some may have been scared out of riskier investments and are more comfortable with an ultra-conservative approach to investing. Others may not have built their savings to the point where they have money to invest beyond day-to-day use of checking and savings accounts.

Whatever the reason for the emphasis on deposit accounts, two implications are clear:

• Given the generally low return environment, individuals are going to have to aim for higher retirement savings rates. As account yields contribute less to your nest egg, you'll have to make up for it by putting more money aside in the first place.
• Shop actively for your bank accounts. MoneyRates.com typically lists savings account rates, money market rates, and CD rates that are significantly higher--in some cases, multiples of--national averages for these account types. It is worth the time to shop around: this poll suggests you might have most of your savings at stake.

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