Never expect a savings account to act like an investment portfolio.
Does it really bother you that your checking and savings accounts aren't currently earning much (if anything)? For example, do you fret because you’re saving for a downpayment on a house in a few years and you might be making more in the stock market? If so, your worry reflects a common misconception of the purpose of investing.
While it appears to be quite reasonable for a client to ask me how she could do a little better on the money in her savings account, expecting a growth investment to be wrapped in a money-back guarantee is illogical. Let’s examine why…
An investment is the purchase of property to create future wealth. Investing is a long-term engagement, a time period for you to let your property grow in value and not meddle with the process.
The return on an investment in the short term (five years) is never a sure thing. In fact, buying property in hopes of reaping short-term growth and/or income isn’t "investing" at all. It’s speculating (which is a high-brow form of gambling). You should never expect an investment to grow much in the short term and you should not be surprised if it declines in value during that time frame. It's totally unpredictable, just like betting before looking at your cards in a poker hand.
So what should you do with money you’ll need in the next few years? Very little except to make sure it will be there for you. In the short term, income is of secondary importance. Being there when you need it is the purpose of an emergency fund because, by definition, emergencies don’t happen on a timetable. The fact that you may earn a bit of interest while your money waits for the next emergency is nice, but not something you should focus on.
Same with saving for a specific need: you don’t want to speculate with the funds for your practice buy-in or your daughter’s wedding in a couple of years. The chance that you may make a killing is far outweighed by the risk that you will need to move the reception to Cracker Barrel when that bond fund takes a nosedive.
What about seniors on a fixed income? Unfortunately, low rates have hit them the hardest. However, most retirees are facing multiple-decade retirements. Low interest CDs and bonds are appropriate only for a five-year window, not 20 or 30 years. The ownership of CDs and bonds should be determined by a financial plan, not by fear or greed.
Remember: the short-term priorities for your savings are liquidity and safety. Long-term priorities are growth and income. Never expect a savings account to act like an investment portfolio.