Ask the Readers: Staying Motivated to Save?

12/07/2011 10:56 am ET | Updated Feb 06, 2012

Sometimes you do everything right -- you work hard, you cut back on spending, you invest for retirement -- but all of your effort seems for naught. You get sick. You wreck your car. Or, as has been the case for the past several years, the entire global economy seems determined to thwart your long-term plans.

What happens when you do all the right things, but the right things don't seem to work? That's what Michael wants to know. He writes:

I'm on solid financial footing with a sizable emergency fund, low debt, and bright career prospects. So this isn't a question of the "Oh crap, I got myself into another hole, how do I get out?" variety. It's more along the lines of "Okay, now what?"

Over the last year, I've watched the APY on my high-interest savings account continually tick down (from a high of 1.2% a year ago to a piddly 0.89% this morning), and the rate of return on my Vanguard investment account fall into the negatives (but not enough that any one of the funds is at a bargain price to capitalize on). Basically, inflation is kicking my butt and it's hard to motivate myself to grow any of those accounts substantially. The only thing that keeps me putting money into my savings account is the goal of owning a home in the next 2-5 years. Even that's more mechanical at this point than something I can get excited about when looking at account balances.

How do I keep myself motivated to keep investing/saving when the rate of return is so low? Seeing my accounts drop in value is incredibly disheartening and makes me wonder if there's some better way to allocate my money over the short term.

Michael is right that savings rates are low. (Don't believe me? Look at the GRS savings account page. Rates are piddly!) For the past four years, U.S. monetary policy has been designed to encourage citizens to pump money into the struggling economy.

It's tough to know what to say about the negative returns on Michael's investment account. I'm not sure what time period he's looking at, and I'm not sure what he holds in the account. But while the market has been sluggish over the past few months, it's actually been growing at a steady clip for the past three years. Michael's negative returns are likely either short-term or an anomaly based on his asset allocation.

The one-year rate of return on my investment accounts is 6.29%. The three-year average annual return is 12.81%. It's true that the crash of 2008 is going to mean that long-term returns look low (the S&P 500′s ten-year average annual return is only 3.69% as of today), but I still believe that in years to come, stocks will outperform most other investments.

Note: As a reminder, the average real return (meaning inflation-adjusted return) for stocks over the past 80 years has been about 6.8%. Bonds have returned about 2.4%. Gold and real estate have returns of about 1%. (Actually, that gold number is surely wrong now because it's based on 2008 numbers, but the return for gold still won't be much more than bonds.) For more info, check out my article on how much the stock market actually returns.

Despite the sputtering economy, I'm continuing to save and invest. Even if the returns are low, they're better than the 0% return if I put the money in cash. And I'm not inclined to just go spend the money on stuff I do not need.

For short-term goals, I'm not convinced there are better options than using a savings account. (Or a certificate of deposit or similar tool.)

And, as I mentioned above, I'm happy to continue investing in the stock market. Whenever the market spooks me, I try to remember Warren Buffett's 1997 comparison of stocks to hamburgers: "Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices." If you're young and investing for the future, you want low prices.

But all of this is academic. Michael's not asking a math question. He's asking a psychology question. As I often say, money is more about mind than it is about math. That's true here, just as with other areas of personal finance. Michael wants to know how to stay focused on the long-term when the short-term looks so bleak.

Have you struggled with a similar dilemma? What's your reaction to low interest rates and a sluggish stock market? Have you given up on saving? Have you increased how much you're investing? How do you stay motivated to save when savings seems counter-productive?

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