What to Know About Low Interest Rates

One of the positive outcomes of the global corona-virus pandemic is the extraordinarily low interest rates currently in place. Plummeting interest is a significant win when purchasing a home, refinancing a mortgage, signing a leasing contract, or repaying debt. Basically, in any situation in which you are borrowing money, low rates give you more money at less cost.

But it isn’t all good news. Where low interest rates do well for qualified borrowers, they do damage for those looking to bolster their savings.

All around the world, the economy is in turmoil and employment markets are chaotic. More and more people are being faced with difficult choices: living with reduced income, plunging into savings accounts and financial reserves, and taking hazardous steps with stocks and investments.

For those nearing retirement age or already in the post-employment phase, these options are grueling. They did everything they could and should to put away money, but corona messed with their well-intentioned plans, forcing them to spend less.

Government issued bonds, for example, are paying less than one percent right now. If you retired today and put away $1 million dollars in a government savings plan, you would only have maybe $13,000 a year, if that. While these used to be considered safe investment options, the current rates are not yielding a livable income.

Low interest rates also mean less return on commercial annuities, a significant source of income for investors. The payout on commercial annuities has gone down by over 50% in three decades.

While some speculators believe that with rates so low right now an uptick is bound to happen soon. It is a logical thought process, but depends primarily on how long you are willing to wait. Some money managers are conjecturing that rates might go below zero, forcing lenders to shell out money just for making the loan. It isn’t a popular route to take, but governments may be forced to make it if the economy doesn’t pick up soon.

Ultimately, lower interest rates are sub-optimal for savings. High-yield savings accounts, however, are still the safest place to store away some cash. Your money will be secure and unharmed by market turmoil yet still available if you need it. For the most part, there is no monthly fee and don’t have astronomical minimum balance requirements.

When interests do eventually start climbing again, you will see bigger returns than if you started investing from nothing.

Written by

Vadim Belyaev is an experienced investor, banker, financier, media manager, and philanthropist, and is recognized as a leading Russian businessman.

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