The Great Recession was “solved” by a number of rapid fire actions by Congress and the Executive Branch. They came together to fund stimulus bills and negotiate with massive banks. They found a way to save most people’s retirements, despite the corruption and chicanery of companies that caused the mess.
We were in a horrible bind. Most people’s entire wealth was wrapped up in real estate and investments, which were tanking. The bubble had popped. Previously, people with little credit and, sometimes, no down payments were able to buy homes. It inflated everything, as people were buying more than they could ever afford.
After the collapse, a lengthy program called for zero-interest borrowing and quantitative easing. The Federal Reserve (U.S. central bank) doled out massive amounts of money to banks at zero and near-zero interest. Effectively, this would enable banks to give borrowers easier access to mortgages, small business loans, and more. The hope was that banks would generously loan out the money.
Then came quantitative easing. Because the interest rates were already at zero, the Federal Reserve (central bank) couldn’t prop up the banks this way any more. They made a last ditch effort and started buying bonds (or, debt) of financial institutions (i.e., Bank of America, Chase, and Wells Fargo).
Every time there was speculation that the discount window to interest-free loans or quantitative easing would come to an end, the stock market would hiccup. Investments would nose dive and a panicked market pleaded with Federal Reserve chairs to hold back – the economy was still “soft.”
Economic stimulation of this sort allowed people to spend more, too. By acquiring low-interest debt, people could buy more, bigger, and better. Everything seemed more affordable when loans were artificially depressed (heck, that’s why I bought a car I couldn’t afford).
People with money bought and bought. And they invested like mad. Those who invested post-Great Recession were rewarded handsomely. From the bottom of the crash to now, the Dow Jones Industrial Average (DJIA) has returned approximately 173%. In other words, investors who got in mid-2009 and 2010 have nearly doubled their money!
One of the saving graces of today’s economy is that inflation has held constant. Throughout 2014, the inflation rate ranged from 0.8 to 2.1% every month. And inflation is an important variable in this conversation, because it’s essentially a measure of affordability. When inflation increases, the consumer price of all goods increases. Everything from bread to cars to homes is affected by this measure.
Thus, in 2014 the average inflation rate was 1.77%. Not too shabby! When you compare that to deflationary or atmospheric inflation, we are in a pleasant sweet spot. The price of goods are increasing at a controlled, moderate rate.
For most of us, the stimulus has worked. My investments are doing better than ever and I’m seeing some sizable gains. The future of my money looks brighter.
Additionally, I have fewer “savings” than ever, and that’s a good thing because I have more invested than ever. I followed the financial advice of the world and realized that cash is a drag. I don’t mean that tongue-in-cheek. Cash suffocates returns, because checking and savings accounts pay next to nothing (even if you choose an online bank). To let cash sit in those accounts means that we accept a pittance and suffer from inflation rates.
Let me put this together. We have benefited from the Federal Reserve’s decision to provide easy capital to banks, which then presumably went to consumers. Similarly, quantitative easing has further supported banks recovery and ability to loan. Investments are spectacular right now, too. But this combination of events has wreaked havoc on the most desperate among us.
The advice for someone like me (who has some – albeit small – amounts of money) is to invest. Don’t suffer the cash drag. Unfortunately, that financial advice doesn’t apply to the poorest among us. Those with irregular and/or unknown paychecks by amount and/or interval can’t invest the money. By investing their funds, they could put themselves at risk because they don’t have enough liquidity. Additionally, they might not be able to invest because they barely have enough at the end of every month to scrape by.
That’s where the advice between wealthy and poor individuals diverges. Our financial commentators tell wealthy people to invest, and the impoverished to save. If only the poor would save more, their lives might be better. Except, if you’ve been following along, “saving money” doesn’t mean protecting money. The average interest rate of savings accounts was 0.06% in 2014. At Bank of America, Chase, PNC Bank, and Wells Fargo – all the brick and mortar banks that those in poverty are more likely to use – the interest rate is a dormant 0.01%.
Let’s say you’re Joe Poverty, trying to save. Mr. Poverty has turned on CNBC, Fox News, and CNN to listen to all the financial advice he can get his hands on. He’s motivated and leans in. He wants to live better, eat healthier, and save for the future. He wants to pay his daughter’s student loans, and he feels guilty that he couldn’t support her. His first step is to open a checking and savings account at a local, popular bank. He needs to be able to pay bills and receive paychecks, but he also wants to begin saving. The checking and savings accounts will pay him 0% and 0.01%, respectively.
Now, here’s where things get really sad. Joe Poverty is going to stay in poverty using this method. Unless he can drastically increase his income and build a huge safety net, he won’t have enough to invest each month. Because he’ll be precluded from investing, his only hope is to save. So he does. And he does. And he does. He’s motivated, remember? He cares about his daughter and wants to succeed.
He drops money here and there into the savings account. But each month that money is worth less and less. Despite his attempts to save at 0.01%, the inflation rate hovers around 1.77%. Effectively, he loses 1.76% every month in spending power. The savings are hibernating, as the world around those dollars is ablaze. The market is benefiting nearly every day from free-flowing capital, but the poorest have had to sit by and watch it happen. Every month, having less.
At some point, Joe Poverty feels like “he’s failing.” He turns on the channels, rereads books, and looks at his savings account. Despite his efforts, he can’t afford to pay off his daughter’s loans. Her loans accelerate at 6.8% interest, as his savings lingers.
This economy disincentivized savings. It trumped up how easy it is to spend and invest, while ignoring those most in need. Savings rates used to 3%, 4%, and 5% only a few years ago. They could easily beat the inflation rate, and incentivize savings. People really added to their wealth when they saved.
Even worse, by disincentivizing savings, those who might need positive reinforcement didn’t receive it. In fact, they were punished for saving. They had less and less each month. The savings were an illusion, and the purposelessness was degrading. Who wants to continue trying to save and add to their income – following the advice of wizened “gurus” – only to find out they’re failing?
The Great Recession hurt nearly everyone. The actions that the government took are debatable. The necessity of those actions are questionable. But the result is undeniable. People have been encouraged to spend free cash and invest for the long term. Neither are bad options in a low-rate environment. Sickeningly, that advice doesn’t apply to everyone.
People in poverty will continue to sit back and watch as others’ lucrative capital increase until something changes. We need the Federal Reserve and the government to incentivize savings like mad. We need an economy and country that’s prosperous for a greater whole, not a select few. The discount window for loans must raise their interest. The quantitative easing must stop. And the world must compromise investment performance for a short while – adjusting to the new rates – to encourage everyone to save.
It’s no longer enough to verbally smack and accost the most destitute without understanding the systemic factors that prevent their success. It’s time we advocate for respect and change these financial practices. Then, and only then, will the advice to “save” make cents.
I remember the savings interest rates being 3% or better and it’s so sad to see where they are today. You raise such good points here – I hadn’t even thought about how we lose money by putting it in savings if the interest rate isn’t better than inflation. Our economy has so much more recovery to do!
Kirsten,
You’re absolutely right. The interest rates were far better only a few years ago. As the economy slid, the rates declined rapidly. I’m glad the article helped clarify the role of inflation when considering savings accounts. You’re SO right, the economy hasn’t really bounced back for those most in need.
Sam
Thank you for writing this. Our PF community needs continual reminders that not anyone can save and invest and have access to the same opportunities. We would for sure accept lower returns on our investments if it helped level the playing field. Same reason we don’t try to find every tax loophole — because we have a responsibility to support our society. One note: our bank, USAA, will let people invest in mutual funds for a very low monthly amount ($25?), with no starter investment. This got us started back when our income was tiny. But your point still stands, that poor people can’t afford to have their money locked up for the long term.
Thank you for reading this! 😉 I appreciate being able to write from this perspective, as I think you’re right, much of the personal finance community addresses middle class finances. The USAA account sound incredible and a wonderful way to start investing! Great suggestion. But I’m glad you acknowledge the last part. If you invest ANY funds with little liquid means, you could be in deep trouble! It’s a real catch-22, isn’t it?!
So well said. Ugh, savings account interest rates. Why is it like that?
Cindy,
Thanks for your comment and compliment. The reason behind those low interest rates for savers is very complex and a great question. For the most part, to spur on the economy, the Federal Reserve and government encouraged them to plummet (both directly and indirectly).
Sam
My ‘savings’ account is mostly a liquid ‘Emergency Fund.” I use it to pay off debts and to fund anything like car repairs or such. I just had to loan my mister over 1000K because his auto engine died. He didn’t have the EF and I do.
I do have a Plop and modest retirement account through work.
One problem when you come from the working class and the lower part of the economy is that you will probably have no guide as to how to do this.
My parents (lost of problems there in the marriage) didn’t invest, didn’t own a home and left me almost nothing. They were no guide to such things and school never taught me any such information.
IF you are on a modest income, you don’t have the cash to hire a financial adviser. And the Credit Union told me to keep saving and build up a huge emergency fund before even thinking about investing outside of my work portfolio (which ain’t even vested).
I am going to start a Roth IRA soon, mostly on the advice of Suze Orzman’s PBS special information,
Another thing that happens to us at the lower end of the scale: The minute we start saving enough to possibly invest … BAM a huge car repair or medical bill comes due!
The old saying “It takes money to make money” is truly true.
The old money in jars and under the mattress form of savings seems to work for me somewhat. It doesn’t earn interest but it ain’t going anywhere, either. I save all my change everyday and believe me, that can add up,
Right on the money, Mel! “It takes money to make money” is a common truism that’s repeated frequently. Unfortunately, if that’s true, then new money is hard to make/come by. We need to have a balanced ability for people to make money and save for a better future. As of right now, that is totally missing. :/
Great point–inflation gobbles up savings! More people need to read articles like this!
The wealthy are wealthy because they know how to put their money to work for them, instead of letting it be lazy in a savings account.
Hey Froogal friend! Thanks for your comment. It’s a tough balance when it comes to being “lazy.” As this article suggests, I don’t believe that laziness is the right word. From what I can tell, you shouldn’t invest without a certain amount of financial liquidity and safety net. But if you can’t make much off your sitting/dormant safety net, it’s difficult to make it to an investment class. That is a tricky bubble that we need to help people overcome. First, it takes raising interest rates to making saving money more appetizing.
Interesting article and spooky timing. I just watched the documentary “Four Horsemen” last night – you can find it on YouTube – and it pointed to many of the endemic issues of the financial system.
It’s hard for the poor to win when the cards are stacked against them and Wall St is the biggest casino of them all.
Highly recommend “Four Horsemen” if you haven’t already watched it.
Diane,
Thanks for your recommendation. It sounds like you’ve got it. The poor have a ridiculously hard time due to systemic concerns. We want a society where people can pick up their bootstraps and work hard, but that’s not the one we’ve created for those most disenfranchised.
Sam
I forwarded a link of this article to Bernie Sanders and if anything comes of it I will share that with you.
We live very close to zeroing out the checking account on a monthly basis and pay cash for nearly everything else that doesn’t need a check. All due to layoff 3 years ago.
Prospects for reemployment at former salary are not very promising without additional investment in a new career direction. As a dislocated worker approaching her mid-50s with an upcoming college student in the house, it’s difficult to decide on making that debt decision (aka educational investment) for myself.
Past poor investing decisions lead me to anticipate working until I die, so that investment still may be a good idea. But I am risk adverse per poor results I have experienced as a liberal arts major.
It would be great to know whether it is a myth or the factual case that I would be erring in pursuing additional training and taking on the accompanying educational debt at this stage for myself.
There is no doubt at this time that my teenager will attend college plus some sort of professional training upon HS graduation.
At least I have my health!
I know you can’t give out precise advise, but I had always heard that such investments made after 50yoa are wasted and wondered if that is still considered the standard expectation.
Thanks!
Catherine,
Thanks so much for supporting the article and sharing it with Sen. Sanders! I just met him the other day and saw his speech. Really interesting platform. 🙂 Also, I really appreciate you sharing some of your story. At the end, it seems like you wrote a question regarding investing around 50 years old. I’ve never heard that it is a “waste” after the age. In fact, many people are still invested while in retirement and taking payments from their accounts. Usually, as you age, the recommendation is to invest more in bonds than stocks. That way you can protect yourself from the swings of the stock market.
Sam
The one exception I’ve heard is when returning to school and acruing debt for that after 50, there is difficulty getting enough return on that sort of investment.
There are many, many lower cost educational options out there right now if you do not go the traditional college route. Online is one way to go. Get skills but don’t worry so much about the paper trail and grades at your point in life!
My blog has links to some of these educational sites. I’ve taken courses at some of them.
Also, there was a program through Microsoft and through some states for retraining laid off workers and helping them upgrade their skill set.
I’m no financial advisor but I would tell you to invest in yourself and your own training so you will have skills to survive as you age. Your teenager can find ways to finance his/her own education through grants, loans, work, scholarships, etc.. You shouldn’t sacrifice your own older age so kiddie can go to college. Way too many people do that.
Sam,
This is a very powerful piece. When there is no incentive to save since inflation overrides interest in standard checking & savings accounts, then why save at all? Circumstances can truly determine a financial outcome. Extending beyond the middle and upper class financial views paints a different picture then most trends we are exposed to. Incentivizing savings is an absolute challenge for most, if not all at some point. It’s disheartening and puts my brain into motion as to how this can be changed. Thank you for this thought provoking piece!
Alyssa,
Thanks so much! I appreciate you sharing your takeaways and questioning how to change the system. We need that! 🙂
Sam
I save regardless of the interest rate. A penny saved is a penny not spent even if the interest rate is lousy. So if I save $100.00 even at the crapola interest rates of today, it’s still $100.00 I have put away for when I might need it more.
And I do believe anyone employed (all but the poorest person) out there can open a Roth IRA.
Our society is built on credit and on the idea that if you spend, spend, spend, you will have a wonderful life. It’s built on the idea that the rich are over-taxed and suffering rather than the poor, working and middle being squeezed.
Until that changes, we will still have the same problem over and over again.
I, personally, am leery of the stock market. Today, with electronic bidding, it is even more rigged in favor of the uber wealthy and other than a few very safe index funds, it is a bit like playing craps in Vegas. You might win big or you might totally screw the pooch and come home broke and owing money.
So save, regardless of whether you get lots of interest or can invest.
Sadly, a penny saved is not necessarily a penny not spent when interest rates are low (quite apart from the inflation rate aspect). I don’t know about US banks, but when you put your $100 into a Swiss bank account these days, you now have less each month due to the fees the bank charges – say, 3$ – for you having an account with them unless you already have a very large sum in the account (and we are almost at negative interest, here, too…) whether you are using their ebanking service or getting postal statements – this is one great big dilemma of our times and zero incentive to save :(.
Under these circumstances, why have banks at all?! 😮 (rhetorical question!!)
My credit union doesn’t charge any fees, so that isn’t a problem for me as long as I maintain at least $5.00 in the account.
I won’t use a bank that charges all the fees people mention.
That tends to be a problem with the bigger banks not with credit unions or smaller local banks.
And while the change I save at the end of each day isn’t drawing any interest in my change jar, it also isn’t having anything taken away from it, so I still have that money as emergency money.
One of the most insightful blogs on the web. Great work, Sam.
Aww, thanks Will! Appreciate it.
Very interesting blog post. It made me sad when I read it. I wish that the interest in savings accounts was back to what it use to be….I bet it never will though.
This is so important. What do you think about myRAs now that they are more open? Certainly not going to garner the same as investing in stocks, and interest won’t even keep up with inflation, but contributions are for all intents and purposes safe and liquid.
Interesting article.
> People in poverty will continue to sit back and watch as others’ lucrative capital increase until something changes.
Hmm…I wonder what makes you say this. If we keep telling people they are helpless, over and over again, they will start to believe they are helpless, and eventually, look towards someone to rescue them. The politicians will be more than happy to indulge in this fantasy. As hopelessness begins to rise, so will the corrupt who can take advantage of the vulnerable masses.
Perhaps, it would be better if we empowered the poor people somehow instead of telling them they are victims. Just a thought.
Great question and direction to consider. The way I see it, the more hurt and financially decimated someone gets, the more desperate they feel. I don’t know that it leads to helplessness, but rather action and resistance. These are very complex psychological questions; great to bring up, but not sure there’s a clear answer.
How to save money when you have little. Go to your bank and tell them you want to invest in ETF this means Exchange traded Fund. This is like a mutual fund but these funds buy all the stock of a particular stock market in the proportional value they are in the stock market. So everything really. You do not pick winners or losers just invest in the future of the economy. So if inflation goes up and the economy follows inflation you will get that return as a minimum. If all the companies in a stock exchange grow over time and they always do. Then your small amount will grow with the economy and you will not be left behind. Again you do not have to know anything about stocks or which ones are good ones or bad ones. You are investing in the economy as a whole. If you believe in the future this is the way to invest. If you believe we are all going to hell then you should not invest. So if you invest 100.00 and inflation is 2% per year then you will have 102 at then end of the year if all the companies in the us do nothing. If the economy grows more than this and 7% is normal for Standard and Poor you grow by 7%. Plus your wages will go up with inflation and you can contribute a little each year.
I stumbled across this article in the first summer of Covid-19.
Three months into an awakening triggered by getting the illness and bring gifted a chunk of money, while the UK Gov also incidentally offered a grant that enabled me to take some time off to manage the recovery and use my brain to consider my predicament.
The first chunk of money I spent on seeds and gardening tools and exhausted my self growing food in a sort of survivalist mentality. And my body in post viral fatigue started shutting down.I use embodiment practices to help explore what was going on physically/mentally, and again as I have hungrily read everything I could get my hands on about the history of the Economy and Society, and Investing for the first time in my life.
I’ve discovered that while I’ve tried to save over the years as a perpetual student and low wage earner I couldn’t ever get on the housing ladder, the goal posts in the UK just kept moving. Perhaps a financial advisor could have helped explain things but I never thought I could have afforded one. Anything with the word ‘Financial’ in felt exclusive to wealthy people . As a parent of a single child and just aged 47, I’ve many skills and experiences under my belt but coming from an arts/religious background and introvert I’ve missed out on financial education, apart from frugal risk averse mentality.
What I’ve learnt about folks around me earning vast amounts of money investing in houses and buy to let’s’, and stocks and shares and pensions, while I and my four sisters have been stuck in financially -dependent relationships, the benefits system, or volunteering/zero hour contracts and other low paid women’s jobs.
I could cry and cry for the years of fear and anxiety that has given us.
Now I want to remedy this. The money I’ve slogged for years to save towards a mortgage, has suddenly gone to nearly zero interest.Ive got to learn about investing. And to share what I learn with others in this predicament.
New apps like Plum and the Robinhood that you have in the States, and websites like Moneysavingexpert.com have helped to slow my ship down, it’s slowly turning. I know there are huge risks but I feel I’ve got nothing to lose, and also that my slow serious in depth research style along with my life experience as a woman should be of benefit in choosing investments.
Any tips would be welcome.. especially as I’d like to find a financial advisor that delights and supports and encourages poor people to gain financial independence and then I’d like to be one. If there’s a best route to that end then let me know..
And thankyou for your article, it made me cry a little….