Your savings account could be costing you money
When it comes to savings accounts, you can suffer big losses.
Buzz60
Banks once rewarded customers who opened a savings account with stuffed lions, cloth bags – and interest. Lots of it.
Those days are over. According to the FDIC, the average savings account now earns about 0.45 percent annual interest. Interest rates remain stubbornly low for savers, even as banks charge their borrowers ever higher interest rates: the key interest rate – the interest that banks charge their most creditworthy customers – is 8.5 percent, the highest level in two decades.
As a rule, savings interest rates rise and fall with the key interest rate. The more banks make from borrowers, the more they can afford to reward depositors. When the Fed raises interest rates, banks tend to respond by paying higher interest on their “high-yield” savings accounts.
But this system has collapsed in the last 18 months. The Fed raised the federal funds rate from effectively zero to over 5%, a two-decade high. The banks did not follow this example.
“The banks haven’t kept up,” said Jeff Farrar, a certified financial planner and managing director of Procyon Partners in Connecticut.
Why not try to attract new customers and their money?
Because the big banks are full of deposits. This is partly due to the pandemic and the federal stimulus campaign, which encouraged the country to save. And it’s partly due to consumer inertia. Bank customers trust the big brands and stick with them.
Customers do not change their savings accounts
“We found that, on average, Americans have had the same checking account for 17 years,” said Ted Rossman, senior industry analyst at Bankrate. “And the banks know this exactly. It’s a very ‘sticky’ business.”
Big banks like Capital One, Bank of America and Citibank “don’t compete on interest rates,” Rossman said. “They compete in national advertising campaigns. They put their names on stadiums.”
In a survey of 3,674 adults in 2023, Bankrate found that only one in five savers earned an interest rate of 3% or more, he said. “And 3% is a pretty low bar.”
Savers could do better, he said. The current market offers people multiple options to park their money and earn 4% or even 5% interest. That’s an additional $400 to $500 per year on a $10,000 deposit.
Some options allow investors to withdraw funds at will, just like with a regular checking account. Others require that the funds remain untouched for a few months or a year.
“We’re talking about the best savings rates we’ve seen in a long time,” Rossman said. “A lot of people could be doing a lot better.”
Older Americans remember how banks competed for their savings, offering bonuses, perks and high interest rates. In the Reagan 1980s, interest rates on regular savings accounts reached 8% as the federal funds rate rose into double digits.
Since the Great Recession, however, savings accounts have returned an average of less than 1% per year. These interest rates reflected the federal funds rate, which has been zero for most of the past 15 years.
Consequences of the SVB banking crisis: Banks may increase savings rates to retain their customers
This fact may partly explain why many people don’t save much in banks. According to the latest data from the Federal Survey of Consumer Finances, the average American family had just $5,300 in checking, savings and money market deposits in 2019.
So here’s the good news: higher interest rates are just a few clicks away.
Check out the best high-yield savings accounts
A quick online search will yield dozens of offers for bank savings accounts that pay annual interest in the region of 4 to 5%. Motley Fool Ascent and WalletHub, among others, offer regular summaries.
Many offers come from banks that are not quite as well known: UFB. Valley Direct. Bask.
“Most people have never heard of it,” Rossman said. “But that’s OK because they’re all FDIC insured.”
Federal authorities cover up to $250,000 per depositor per bank. As long as the offering bank has FDIC backing, experts say it should be a safe home for your money.
Many high interest accounts are with banks that are only available online. There is no way to drive to a branch and meet a cashier.
If you’re afraid of change, consider keeping the checking account you’ve had for 17 years and opening a new, high-interest savings account.
“You can seriously open one of these accounts online in just a few minutes,” Rossman said.
Other options abound.
Money market accounts
One of them is the money market account. They are offered by banks and credit unions with support from the FDIC or the National Credit Union Administration. They generally aren’t as flexible as savings accounts: you may not be able to deposit and withdraw money as easily.
Money market accounts were dying in the low interest rate years, but not today. Competitive interest rates range from 4% to 5%.
“They’re kind of a step up from a savings account,” said Ed Snyder, a financial advisor in Carmel, Indiana. “Still very liquid,” meaning the funds can be easily converted into cash.
Check out the best CD prices
Savers who don’t expect to withdraw their money in the near future might consider certificates of deposit. Banks offer CDs at comparatively attractive conditions and are supported by the FDIC. In return, the depositor agrees to leave the money in the bank for a certain period of time: a few months, a year or ten.
In the past, banks typically rewarded their customers with higher rates for longer-term CDs. However, in 2023, interest rates favor the shorter-term investor. Short-term interest rates are high because investors expect interest rates to fall in the long term.
What makes all of these options so attractive, experts say, is that they carry almost no risk.
“Don’t worry about the labels,” Papadimitriou said. “Whether it’s a CD account, checking account, savings account or money market account, put your money where you can get the highest interest rate.”