By Jonnelle Marte
Financial advisers and brokers have been telling clients for months that it’s becoming a great time to invest in everything from dividend stocks to a new home. And yet, the latest figures from the government suggest many are still sticking their money in one place: the bank.
In fact, despite the Federal Reserve’s move to continue to discourage bank deposits by keeping interest rates low, America’s savings rate increased to 4% in December, from 3.5% the month before, the Commerce Department reported Monday. And though personal income grew 0.5% in December, spending was flat.
“Consumers are hesitant to spend,” says John Lonski, chief economist at Moody’s Analytics.
While the 4% savings rate does include some investments–recent data shows that Americans are largely yanking money out of stock funds and putting it into safer vehicles like bond funds and bank accounts. For instance, investors pulled nearly $29 billion out of equity funds in December while pouring roughly $10 billion into bond funds, according to data the Investment Company Institute released Monday. Meanwhile, monthly bank deposits, which include checking, savings and money-market and CDs, averaged $62 billion in 2011 through September–four times the average of 2010, according to Market Rates Insight, a provider of competitive information and analysis to the banking industry.
The flight to safety persists despite the Federal Reserve’s best efforts to push yields down lower and make saving less rewarding. “The Fed is almost begging individuals to take on more risk,” says Lonski of Moody’s Analytics. “It’s not working.” Many investors are still turned off by the market collapse of 2008 and the volatility that shook stocks last year because of fears over the European debt crisis, he says. What’s more, some consumers are still hesitant to spend their cash because their homes are dropping in value, which causes a blow to their sense of wealth, adds Lonski.
Of course, money needed in the short term should be stashed in the bank, advisers say. Emergency savings and any cash that is needed in the next six months to a year should be kept away from risks that can be incurred in stocks and bonds, says Scott Halliwell, financial planner with USAA. “It’s got to stay liquid. It’s got to stay safe,” says Halliwell.
Still, advisers warn long-term savings can dwindle while sitting in the bank. The average rate on savings accounts is 0.36%, according to MRI and one-year and five-year certificate of deposits have an average yield of 0.33% and 1.57%, respectively. Meanwhile the Fed is expecting annual inflation to range from 1.4% to 1.8% in 2012. Yields have also been sinking on most types of bonds, making it less rewarding for investors to lend money to companies and the government, experts say. Low bond yields also increase the risk that rates can come up and cause bond prices to drop, they say.