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Why national savings account rates are still low

Financial Advice


Articles and research about personal finance

Financial institutions can't raise interest rates until more Americans save

Financial Advice


Articles and research about personal finance

Tired of Low Savings Rates? Then Save More

Published August 5, 2016

Why Savings Account Rates Are Still Low

A decade ago, it wasn’t uncommon to find 4 to 6 percent interest rates on the savings accounts and CDs offered via banks and credit unions. The accounts were attractive venues for your money because they were liquid and earned an ROI similar to many stock portfolios without the inherent risk.

As of July 18, 2016, the average rate among FDIC-insured lending institutions in the U.S. was 0.06 percent for deposits of less than $100,000. Those numbers have barely budged over the past several years, a source of disappointment to traditionalists who like the ease and stability of such accounts.

What’s going on? A number of economic factors are involved, as detailed below. But the vast majority of analysts believe such rates will rise again, optimism that’s increased since the Fed raised the key federal funds rate to 0.25 percent last December. And there is a silver lining: Low interest on savings also translates to low interest on consumer and business loans.

The main thing to remember is that low rates shouldn’t keep you from saving. Not only will you need cash on hand for the future, but analysts point out that money put into savings or CDs (known as “Certificates of Deposit” at credit unions) stimulates the economy as much as money spent, since it’s used to fund important loans. In fact, the very purpose of the banking system is to guide savings into new spending.

Further, consumer dedication to saving could very well boost the economy, ultimately leading to better interest rates.

“Over long periods, it’s savings — not consumer spending — that finance the investments in mainframes, robots and other capital equipment that enhance productivity and drive economic growth,” confirms Shawn Tully in Fortune.

Factors in Savings Interest Rates

Consumers may not be happy about prevailing interest rates on savings accounts, but they shouldn’t blame their financial institutions. While credit unions and banks do choose what rates they offer, their choices are highly dependent on the prevailing demand for loans and mortgages along with the interest they can charge such borrowers. When the economy drops demand does too, and lenders can’t make a profit if they can’t lend your money at a higher rate than they’re paying you. But they must offer you at least small rates of return so they maintain a certain monetary threshold with which to offer loans.

Another huge trickle-down factor is the cost lenders incur when borrowing money from the U.S. government to lend to others. Under present conditions, lenders can get governmental money for loans at about .75 percent, paying out about 1 percent interest on savings accounts, charging 4 percent for consumer and business loans and keeping the difference as profit. In weak economies the Federal Reserve tries to help by lowering the Federal Discount Rate and the Federal Funds Rate, which encourages lenders to borrow from the government and loan to each other so they in turn can loan to business startups to boost the economy.

When the economy improves, the Fed begins to look at raising rates again. But the timing and amount of such increases is crucial, since unemployment and inflation play a major part. The wrong decisions can profoundly disrupt both the U.S. economy and global financial markets. The change in December, for example, was considered the wrong move when it was followed by volatile swings in financial markets.

Why You Should Keep Saving

In short, consumers need to save in today’s environment for reasons that extend beyond interest concerns.

Advocates point to future needs like college education, health care and retirement expenses, many of which have been outpacing the Consumer Price index. That’s of concern to financial advisors who note you should save at least 10 to 15 percent of your annual income for retirement alone. Other experts point to uncertainty about future property values, rising taxes and employment benefits.

An alarming Bankrate survey last year found 65 percent of Americans lack substantial emergency savings and 29 percent have none, marking the first time in the survey's five-year history so many have reported zero savings. Another source reports the average household in the U.S. holds a total debt of more than $90,000.

“If you're like most Americans, you aren't saving enough money,” confirms Kimberly Palmer on money.usnews.com. “That's a problem, because it means if unexpected costs come up — an emergency room visit, a car accident or a high air conditioning bill — they can create stress and even go unpaid. That scenario can lead to bigger problems, including escalating debt.”

As the economy improves, lenders could start raising savings rates to encourage you to keep your money with them. Until that happens, you should shop around for maximum rates, also determining whether your ROI could be slightly higher through short-term CDs or a ladder of CDs.

“Save steadily,” advises Anne Richards on Financialtimes.com. “Market timing is pretty difficult. If you don’t have a monthly savings scheme or monthly pensions contribution, set one up now. All the evidence points to the fact that people who have saved through the cycle do better overall than people who try and time it.”

Save Your Money at Amplify!

Amplify's deposit account rates are among the best in the Austin, TX area, making us a great financial institution to keep your hard-earned savings. We offer Savings Accounts, Money Market Accounts, Certificates of Deposit (CDs), and IRAs. And since we're owned by our members like you, you can rest assured that you're in good hands.

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