The financial crisis of 2007 – 2010 has caused an influx of people to save their money rather than spend it. But the low interest rate saving accounts provided by financial institutions are also frustrating people. And economists say that those low interest rates are here to stay for remainder of the year.
So how does a person make their cash work for them? It’s not the best investment to deposit that cash into a savings account. Considering the best savings account rate, with low minimal deposit offers 1.35%, versus the rate of inflation at 2.9%. Cash is… well losing its value in that case.
Can one beat the odds?
Is it possible to find rates that will keep even with this year’s current rate of inflation? The Simple Dollar questioned if a person could make money chasing rates, by “carefully watching the yield rates on savings account, signing up for a top account, and transferring their saving to the highest-yield bank”. He found its possible but its a lot of work and maintenance to keep up with bank rates and open accounts. It also didn’t seem worth the investment to keep moving around. That is unless he found a competitive rate that had a significant rate difference of at least 3%. I agree.
The other option
Invest in Your Mortgage. Its a different way to raise your returns. With savings account interest rates so low, “Consider paying down your mortgage instead of chasing interest rates”, says Christine Benz, director of personal finance at Morningstar.com. This route is recommended if you are close to retirement, or don’t have much of a mortgage-interest deduction. And advises to do so only if you have an emergency fund in place (which we all do, right?).
To see how much you could save by paying off your mortgage early, try this calculator provided by DollarTimes.com:
My Thoughts
I think the best scenario will depend on a person’s unique financial situation. And is a question for those people who have already used that extra cash to get out of debt. Fortunately, my husband and I participate in the Accelerated Payment Program with our Mortgage at Chase Bank (formerly Wamu) – we pay our mortgage payment weekly and is automatically withdrawn from our checking account. It saves us approximately $40,000 over the life of the home loan.
But if I was not given the option to Accelerate my mortgage payments… And if my debt was paid off, it would create a substantial balance of cash available to consider such an concept. And if my cash was not seeing optimal results in my savings account, than I think the piece of mind offered from having the mortgage paid off or lowered would be worthy.
What’s your thoughts?
What do you think about this last option? Is it better to invest in your mortgage? To use that cash to cut the total interest and term on your mortgage.
{ 18 comments… read them below or add one }
Hi,
we have had two mortgages that allow overpayments to be made, and I would highly recommend this if you are lucky enough to be in a position to pay off extra amounts above your normal monthly figure. The yearly statements which show what you have saved in interest over the lifetime of the policy are truly staggering!
That is nice you get that option. With ours, since we set it up to be paid weekly, I also like the fact we don’t pay one big lump sum each month. The weekly payments fit nice into our budget.
I love statements that show me I saved.
That is the sweetest calculator ever! I’m just starting to shop for my first home and being able to repay my future mortgage as soon as possible is a big deal for me. I definitely want to be aggressive when it comes to this.
Well, I am glad you like it (and glad I found it). But make sure you pay off any other high interest loans first. Then again, if you are buying a house, I would assume it all or most would be paid off any way.
Let me know how your house hunting goes. Seems like a rather nerve racking journey to find the right house for your buck. (my husband owns this house. when we buy the next house it will be in both our names).
Will do. I’m just starting. In the “finding the right Realtor” phase.
i like the thought of investing into your mortgage. this is a great way to pay down your house and create probably the most equity of any other investment.
you’re probably right (unless you’re living in California). If you have the cash and low or no debt, I think its a great option. I would love to feel ultra secure in knowing the house is mine.
Christine, I like the new layout!
Perhaps when I was a bit younger, I’d chase rates.
But if I had a mortgage, I’d consider paying it down faster depending on what the interest rate is.
A third possibility I’d think about is investing it for the long term. Although not guaranteed, sites like Lending Club are advertising higher returns. I’d also consider putting the extra money into some diversified mutual funds.
If the average investment returns over the long term are greater than the mortgage rate, it might be worth investing instead.
Thank you. There is still a bit more tweeking, but I think I got most of it. Do you like the blue background?
Chasing rates seems like a lot of work. I’ve done it my CC, but only once; not savings accounts.
I have a loan with Lending Club. And some of my blogging friends are investors. They say they are seeing good returns.
I think you just run the risk of someone defaulting on their loan. But you can access the risk via credit rating with the loan you wish to invest in. So that is a good thing. Thank you for the valid point.
I guess the most sensible option is to just put as much into paying down debts right now assuming you have a year or so worth of earnings tucked away as a long term emergency fund…. I don’t remember seeing decent savings rates for a long long time now so no idea when they will be back!
Seriously. I wish they would come back now that I know most of my P’s and Q’s about finance.
And I can’t wait for the day I can say I have a year’s worth of savings tucked away!
after investing in retirement savings, it’s definitely a good idea to tackle debt right now. unless you have some other way of guaranteeing a nice return, then the return from debt payoff is the way to go. but like you say, it’s all about your own individual goals. do you have to pay to be a part of that acceleration program or is that a free service?
I am trying to find our paperwork. I want to say they collect a very small admin fee from our weekly transfers. Like < $3 a week. Which is $168 per year. We have about another 10 years to pay the house off. So they will make a couple grand. I still see it as a win-win situation with us saving $40K.
Hi Christine. Great idea to accelerate your mortgage payments. What our family does is send an additional 1/12th of a mortgage payment with each monthly mortgage payment. In the end it comes out to making an extra payment each year. Great topic.
Chasing interest rates seems exhausting to me, and probably not worth my time. (Imagine filing your taxes with all those changes.)
My oldest son is a sophomore in high school and I have been thinking of putting all our extra money into our mortgage (this is after all other saving is covered, emergency funds, vacation, etc). This is also attractive to me because he is considering some pretty expensive schools. If I have 50,000 in cash, I am sure the financial aid services will see that as money available to be used for college. But, if I ‘bury’ it into my house, I am hoping it won’t be viewed that way. I am on track to have my house paid off in 7 years, but I just may be moving that up.
It does, huh? I don’t think I would do it either. Who wants to keep filling out applications, too? That is as much drudgery as sending applications/resumes.
So, is my son. Aren’t they expensive?! Least your son knows what he wants to do. Mine is still trying to figure it out, but I plan on taking him to a couple art college tours this summer.
You know, you might consider an Ivy League school. I heard they are offering pretty awesome financial aid packages to low and middle income families.
I am with you on this one! We’ve been steadily increasing the extra payments to our mortgage since we moved in. In addition we throw any unexpected excess there as well. We track every payment and determine the impact. To date we are already on track to save over 100K on our mortgage. Right now we are on track for our 30 year to be paid off in 16 but our stretch goal is 12.
Awesome calculator! Love playing around with these.
Right now, I get 4% for about 98% of all my cash savings vs. a mortgage blend of about 5%. Hence, I try and pay down using 10% of my cash flow a year.
It’s just accounting really. Say you have a $500,000 mortgage but $500,000 cash in the bank… it doesn’t really matter where the monies is.
It would be nice come retirement time though to have no debt.
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