The Jumbo CD in Your Garage

These are lean times for savers. Ben Bernanke and the Federal Reserve (not a music group) have declared war on us. They have declared that interest rates on savings will be held close to zero. Meanwhile, inflation is running near 3 percent, so savers are losing purchasing power.

Recently, the national average yield on a 1-year CD, according to Bankrate.com, was 0.34 percent. The yield on a 1-year Treasury was less than half that, only 0.16 percent.

Today, if you invest $10,000 it will provide interest income of $34 a year. Paid out quarterly, the $8.50 won’t be enough to buy lunch for two at McDonald’s. If you wanted enough interest to pay $500 a month for food, which is less than most people spend, you’d need to have $176,470 in CDs. That’s a lot more than most retirees have.

The ongoing yield famine is leading millions of savers to take risks they shouldn’t. Many will fall victim to offers that are literally “too good to be true.” Trust me, when someone is offering a 6 percent yield in a 2 percent market, there’s a hitch.

That’s why we need to start looking in odd places for an alternative. We need to find ways to create the equivalent of interest income. We can do that by looking for ways to cut what we spend while getting the same product or service.

The best opportunity I’ve found is in my garage. You probably have an opportunity there, too.

The opportunity is simple: replace a low-MPG vehicle with a high-MPG vehicle. Here’s the math. Suppose you have a vehicle that gets 22 miles to the gallon. Suppose you replace it with one that gets 44 miles to the gallon. If you drive 15,000 miles a year this means you’ll be buying 340 gallons of gasoline instead of 680 gallons, a savings of $1,269 at the current national average gasoline price of $3.73 a gallon. The gasoline is paid for with after-tax income so if you were in the 15 percent tax bracket you’d have to earn $1,493 in interest to be able to pay for all those gallons you might be saving.

So, which will it be? A change of vehicle— or $439,118 in 1-year CDs? Yes, you would need to have $439,118 in a 1-year CD to get $1,493 in interest.

To put that $439,118 in some perspective, the most recent survey of 401(k) account balances by the Employee Benefit Research Institute found that the average account balance for employees who were over 60 years old with 30 years of job tenure was highest of all age and tenure groups— yet it was only $202,329. This means boomers who’ve had long and stable careers could get twice as much benefit from changing to a fuel efficient car as they can get from a lifetime of saving.

Needless to say, we can do a lot of quibbling about how this is measured. Here are three big quibbles:

  • The change in fuel efficiency might not be so great, so the fuel savings would be smaller. (Then again, the cost of gasoline is expected to go up, not down.)
  • Using an absurdly low interest rate isn’t realistic. History says rates should be higher. If you assume higher rates, the case isn’t so compelling. At 4 percent, for instance, you’d need only $37,352 in CDs to produce the interest income needed.
  • You won’t enjoy the benefit if you have to take on a car payment to change cars.

There have been times when decisions like this weren’t an option. During the first OPEC embargo in 1973, for instance, it didn’t matter how much you wanted to exchange your gas guzzler for a better-mileage car— the vehicles simply weren’t available. And when they were, dealers wouldn’t take a guzzler in trade. You were stuck with it.

But that isn’t the case today.  Used car prices are strong. Toyota’s Prius has multiple competitors. Fuel efficiency in new vehicles has improved across the board. And more are coming, so we have choices.

There is even some evidence that a shift is already underway. It was recently reported that in Austin, Texas, the heartland of SUV country, Fiat of Austin sold more tiny Fiat 500s than any other dealership in the country.