As if that weren’t enough, lowering interest rates is a very inflationary thing to do.  Basically it works like this – lower rates encourage everyone to borrow more.  Cheap money is more attractive than expensive money, after all.  As more borrowing takes place, the money supply increases, and prices go up as a result.  Economics 101, for the college graduates among us.  Inflation is already bordering on out of control – something you surely have noticed at the grocery store.  Increasing inflation is sure to make it tougher on all but the super rich.

What can you do?

Bend over.  What else can you do?  If times were different, I might say toss some of your spare cash in the stock market, so you have a better chance of beating inflation.  However, the stock market is in shambles with no signs of a bottom being near.  Hold on to that cash, even though it’s value decreases by the day.  I wouldn’t say it’s the best place to be, but rather the “least awful” place to be.

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Don’t forget about that whole impending bankruptcy thing

No one really knows for sure whether WaMu will bite the dust or not.  It’s up in the air, and could really go either way.  If they do happen to fail, there’s a potentially large problem.  Sure, the FDIC will jump in to save the day.  Only problem is, the FDIC has far less on hand than WaMu has in deposits.  By the time WaMu pays all their debts, will there be enough to give you back your savings?  Who knows.

Think about the risk to reward ratio

I see putting my money in WaMu as a risk – a fairly significant one.  There’s always the chance the government will simply print more money to satisfy the FDIC’s purpose.  In that case everyone will get their money back.  ( The problem of inflation is for another post ).  But there’s a very real chance that the bank will fail, and you won’t ever see your money.  For that kind of risk, I want a hefty reward.  Four percent interest isn’t nearly enough to convince me.  Before I put my money in WaMu, I’d put my money in the stock market.  I have a similar risk of loss, but with a chance for greater reward.

If you want the rate, be smart

If the 4.00% APY is too tempting for you, I understand, and I won’t try to talk you out of it anymore.  But do yourself a favor.  Don’t put your entire savings into WaMu.  Make sure you have a sizeable chunk elsewhere – just in case the FDIC does have to step in.  While they’re figuring out how to get your money to you, you’ll still have an emergency fund that’s accessible.  Remember, these times are strange, and banks aren’t quite as safe as we’ve been used to.

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Surely by now you’ve seen some of these dollar coins floating around.  First came the George Washington coins, then John Adams, Thomas Jefferson, and now James Monroe is in production.  These coins didn’t replace the Sacagawea coins, but rather are supplementing them.  They’re gold-ish in color, and slightly larger than a quarter.  Before anyone freaks out ( as some have ), the phrase “In God we trust” is on the coin, though it’s on the edges rather than the front or back.

Paper money doesn’t last

My wife and I give our 9 year old son $10 in allowance each week.  Whether that’s too much, too little, or just right – I don’t know.  But it’s what we decided, and we’re sticking with it for now.  Previously, we would just give him a $10 bill on Sunday.  Inevitably, the entire amount would be gone by – get this – Sunday evening.  That one single bill would burn a hole in his pocket, and it had to be spent immediately.  The only time it would last is if we didn’t go out on Sunday.

The switch to coins

I want to instill the importance of saving to my son.  I spent my early adult life making financial mistake after mistake.  One after another culminated in a crushing amount of credit card debt, that I’ve only recently managed to move past.  I am still working on building a solid saving foundation.  With my son, I want him to understand from a young age that saving is important.  So instead of a single $10 bill, I’ve begun giving him 10 $1 presidential coins.  For one, he thinks they’re really neat.  More importantly, it’s easy for him to set several aside in a “piggy bank” before blowing the rest on crap.  He’s a kid after all, so I’m ok with him doing just that.  It’s just that this way, he’s enjoying his money and saving at the same time.

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Nowadays though, high rates are becoming harder and harder to come by, and become less impressive. For example, HSBC Online Savings only offers 3.05% APY – a far cry from what they used to offer. Don’t get me wrong, I’m not saying that the banks are at fault. After all, they can’t be expected to lose money on our savings accounts. My point is just that the situation is not as rosy as it used to be.

Low Savings Rates Mean More Decisions

If my savings account pays me just 3%, then I have a problem. The US Government officially puts inflation in the 3-4% per year range, which is already worrisome. If I earn 3% ( minus taxes of ~30% ), for an after-tax return of roughly 2.1%, and inflation runs 3.5% – I lose money every year. The purchasing power of my savings account will actually decrease even after the interest that I “earn”. Even worse than that, the government’s inflation numbers don’t include things like energy or food – two very big expenses. And these things are becoming expensive at a much faster rate than 3-4% per year.

Should I stop saving?

Based on the above paragraph, it almost sounds like I should stop saving money. What’s the point, after all? Well, even knowing that my money is worth less year after year, I will still contribute to my savings account. I need an emergency fund. This fund needs to be liquid, easily accessible, and risk-free. I’m willing to give up a small percentage of this cash each year to satisfy those requirements. You should do the same – even knowing the downfalls.

Diversifying your cash

What I won’t do, however, is build a large cash savings account. I am working on diversifying my cash accounts – something that isn’t really talked about anywhere. Instead of going into it here though, I’ll write up another post about it so I can go into more detail. Ultimately though it’s a hedge against inflation, with the idea that I won’t lose as much / any money to inflation each year.

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We no longer celebrate the Plastic Christmas, for a number of reasons. One, I make a lot more money ( that helps tremendously ). Two, my wife and I are better at managing our money. And three, this is the big one, we have a Christmas fund. Luckily, this is something my job offers. I choose the percentage ( currently I go for 5% ), and they take that amount out of my paycheck, after taxes, automatically. I never see this money, so I really don’t miss it. Once the fund maxes out at $2,000, they stop taking out the 5%. I get a 5% raise for the rest of the year – neato!

I’m actually lucky enough to get a 50% bonus on top of that money ( so I get $2000 + $1000, and pay taxes on the $1000 ). That’ll be about $2700 this year for my Christmas needs. While it sounds like a lot, it has to cover gifts for myself, my wife, our son, our entire families, and plane tickets to visit our folks. We may or may not decide to stay in a hotel this year. The money is quickly used up, but it serves its’ purpose well. Without that fund, Christmas would be a lot more stressful than it already is.

Set up your own Christmas Fund

If your job offers a similar plan, you’d be foolish not to take part. A 50% return on your money, in addition to a stress-free Christmas is hard to beat. But if you don’t have that benefit, that doesn’t mean you should miss out on the fun. Open up a separate savings account. Each time you get paid, calculate 5% of your take-home pay, and transfer it to your Christmas savings account. Set a limit ( whatever you feel comfortable with ). Once you hit your limit, stop contributing – you just got a 5% raise. And when Christmas rolls around, you don’t need to fret about what to do – you already have a fund set up. Relax and enjoy the time with your family instead of worrying.

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ING Direct used to lead the board in interest rates for online savings accounts, but that’s not really true anymore. Though I do still have an ING account, there’s only a few dollars in it, just to keep it active. Every time the Fed drops rates, ING is among the first to drop their own. The other banks follow, but not quite as enthusiastically. Currently I have my savings sitting in a Bank of America money market account that pays 4.61% APY. Anyone out there still using ING should consider switching – they haven’t been truly competitive on rates for quite some time.

Hi there - could you help spread the word about Llama Money? This is a new site, and I could really use your help in getting my work out to new readers. If you would send someone a link, email, or even mention it to your friends, I would appreciate it. ING Direct drops rate to 4.20% is a post from: Llama Money