Your Savings Account: Is It Costing You Money?
When it comes to savings accounts, you may be losing out – big time. Gone are the days when banks rewarded customers with stuffed animals and high interest rates on their savings accounts. According to the FDIC, the average savings account now yields only about 0.45% annual interest. Meanwhile, banks are charging higher interest rates to borrowers, with the prime lending rate currently sitting at 8.5%, its highest mark in two decades.
Traditionally, savings account interest rates rise and fall in tandem with the prime rate. However, this system has broken down in the last 18 months. Despite the Federal Reserve raising the benchmark Federal Funds Rate to over 5%, the highest in two decades, banks have failed to raise their savings account interest rates accordingly.
“The banks have not kept up,” says Jeff Farrar, a certified financial planner and managing director of Procyon Partners in Connecticut.
So why are big banks not trying to attract new customers with higher interest rates? One reason is that they are already flush with deposits. The pandemic and federal stimulus campaign have encouraged the nation to save, resulting in an abundance of deposits. Additionally, many bank customers tend to stay loyal to big brands out of trust and inertia.
“We found that, on average, Americans have had the same checking account for 17 years,” says Ted Rossman, senior industry analyst at Bankrate. “And banks know it well. It’s a very ‘sticky’ business.”
Nevertheless, savers can find better options in the market. There are several ways for people to earn 4% or even 5% interest on their money, yielding an additional $400 to $500 a year on a $10,000 deposit. Some options allow for easy withdrawal of funds, similar to a checking account, while others require leaving the funds untouched for a few months or a year.
““We’re talking the best savings rates we’ve seen in a long time,” says Rossman. “A lot of people could be doing a lot better.”
Older Americans remember a time when banks competed for their savings, offering premiums, perks, and high interest rates. Rates on ordinary savings accounts reached 8% in the 1980s. However, since the Great Recession, savings account rates have remained below 1% on average, mirroring the Federal Funds rate.
This has resulted in many people saving less in banks. The median American family held only $5,300 in checking, savings, and money market savings in 2019, according to data from the federal Survey of Consumer Finances.
The good news is that higher interest rates are within reach. A quick online search reveals numerous offers for bank savings accounts paying annual interest in the 4% to 5% range. Many of these offers come from lesser-known banks, but as long as they are FDIC insured, they should be a safe place to keep your money.
Additionally, money market accounts, which offer rates in the 4% to 5% range, can be a step above traditional savings accounts. These accounts may not offer the same level of flexibility, but they are still considered very liquid.
For those who don’t need immediate access to their money, certificates of deposit (CDs) can provide attractive rates. With FDIC backing, CDs require depositors to leave their money in the bank for a set period, ranging from a few months to several years.
The appeal of these options lies in their low risk. “Don’t worry about labels,” advises Papadimitriou. “Whether it’s called a CD, a checking account, a savings account, or a money market account, put your money where you can get the highest interest rate.”
In conclusion, if you’re currently saving in a traditional savings account, it might be time to explore better options. With higher interest rates available in the market, you could be earning significantly more on your hard-earned money. Don’t let your savings account cost you money. Take a few minutes to open a new high-yield savings account or explore other options that best suit your financial goals and needs.