Low rates create saving quandary

CHICAGO – Life without inflation is easier on consumers, taming prices on everything from food and lodging to clothing and heating fuel. It sure can make it tough to find a decent rate of return on their cash, though.

That challenge just got prolonged with the Federal Reserve’s announcement earlier this month that it intends to hold interest rates at a record low for “an extended period.”

While the Fed’s decision strengthens prospects for the economy, it means yields from CDs as well as savings and money-market accounts at banks will remain minuscule, leaving people in a quandary over where to put their money.

Rates of return won’t improve appreciably until the Fed starts to lift short-term interest rates, and pundits don’t see that happening until late 2010 or early 2011.

So if rates aren’t going to go up for an entire year, what should you be doing? There’s no one-size-fits-all solution – it depends on your circumstances. Proceed cautiously before adding risk to your bread-and-butter savings, however.

Here are some key points to keep in mind in the quest for palatable rates:

1. Keep low rates in perspective: Today’s paltry rates at least beat inflation of virtually zero, albeit barely.

“In terms of buying power, you’re actually doing better now than you were a year and a half ago even though it doesn’t feel like it,” says Greg McBride, senior financial analyst at Bankrate.com, which provides data on the latest bank interest rates.

2. Think short-term: Part of staying patient on rates means not trying to generate more interest income by looking at maturities of longer than one year on CDs or other fixed-rate products. The rate boost you’ll get will be minimal and you’ll still be locking in a small rate of return.

3. Consider alternatives: While there’s no surefire way to get great rates, think about alternatives such as bond funds. Some financial planners are steering their clients into short-term investment-grade bond funds. These funds invest in short-term (due in nine months or less) debt instruments rated BBB or higher by Standard & Poor’s or Baa or better by Moody’s.