Don’t we live in funny times? We’re in a new era where many American’s pay more attention to the need to save for some specific event in the future, yet the mainstays of safe investments have yields returning next to nothing. We are living in an environment where savers are not rewarded, but penalized.
It’s perplexing to be a saver in our current environment. Yes, you can always add more risk in the hopes of gaining a better return, but many savers do not see this as a viable option. In an environment of near 0% return, what is a saver to do?
Many savers realize that their return on investment (yield) directly impacts their ability to reach their savings goal. Therefore, in a higher yield world, the less money a saver needs to store away each month to reach their goal by the desired date.
On its face, lower interest rates would seem as a discouraging factor to the act of saving. This only works in a world in which we indiscriminately consume or save. If I can choose to save or spend and feel no difference in either case, then lower interest rates would push me towards greater consumption, while higher interest rates would pull me towards a greater rate of savings. When saving is more of a necessity than an open choice, lower interest rates become a bane to success rather than a factor that discourages savings.
The way interest rates influence our proclivity to savings is in the eye of the beholder. Today more eyes see savings a necessity rather than a choice. Unfortunately, in such a state, low interest rates do not drive more consumption, but exacerbate the need to save more.