On Thursday the European Central Bank did what a lot of folks thought unimaginable by cutting its interest rate by another 10 basis points, from almost zero to even closer to zero. “Super Mario” Draghi also announced the ECB would start buying asset-backed securities. Fully-fledged quantitative easing like the United States has put into place now is the only option left to fight the sluggish economic recovery and looming deflation in the Euro area.
To most people ECB decisions are just a bunch of economic hocus pocus, even though they have quite a large impact on the personal lives of ordinary citizens through banking products and services. In Belgium, for example, most banks have been reducing their interest rate on savings accounts from 3% in 2007 to around 0.3% on average today because of ECB policies. That means about 250 billion euros of savings are earning next to nothing.
That’s why a couple of Belgian newspapers took it upon themselves to educate their readers on alternatives to savings accounts. The best advice the economists they interviewed could come up with were “spending and investing.”
That’s right, “don’t put off buying a new kitchen or a brand new car, and, if all else fails, just buy art.” Why bother saving and putting your hard-earned cash in a savings account when you can just buy stuff now, because “you’ll buy even less with your savings in the future.”
And, oh yeah, there’s also another option, but it’s too risky, so you should probably stay away: “Stocks are the only real option if you truly want to save.” If you’re even more adventurous, you can also “start buying bonds in other currencies like the American dollar, because we expect a devaluated Euro in the next couple of months”. You shouldn’t buy gold though, “because that’s only a good investment right after a geopolitical crisis.”
Let’s recap the advice given to ordinary people looking for alternatives to a classic, government-backed (up to €100,000) and completely safe savings account:
- Buy a new kitchen or car. Basically, spend your savings.
- Invest in art.
- Buy Belgian stocks, but remember that’s dangerous.
- Don’t buy gold, because there isn’t enough geopolitical turmoil.
- Buy bonds, but only in foreign currencies, because the Euro might lose its value.
I have no idea where to start. This has to be the absolute worst advice since someone told Justin Bieber it was a good idea to pursue a carreer in music.
What about mutual funds, heck even index funds and exchange-traded funds? Or insurance products that yield 2% on average? Or dividend growth stocks? Or just a simple tip to ride out the storm and enjoy the basically non-existent inflation level of 0.02%? Pro tip: if you don’t own a car, your inflation level is negative already, so you can earn money by stuffing it under your mattress.
If this is the level of advice your Average Joe is accustomed to, I fear for our future survival as a species. On the flip side, the above means there’s still a lot of work to be done by the online personal finance community, so keep on spreading the
spending saving and investing message!
As many of you know, I’m a big proponent of saving and investing, mostly in ETFs and dividend growth stocks. There are a bunch of other options out there though, so I’d like to know what you would do with your savings when a basic savings account yields next to nothing?