Lack of interest: Rates on savings are ‘almost an insult’
Historically low interest rates are a boon for homebuyers. Not so much for savers.
Low rates for borrowers typically also mean lower rates for savers. Because banks are earning less on loans, they typically pay out less on savings to make money.
The average rate paid by banks on basic, federally insured savings accounts — known as the annual percentage yield — was a mere 0.05% as of Sept. 14, according to the Federal Deposit Insurance Corp.
That means if you had $5,000 in a savings account, you would earn $2.50 a year on your money.
“It’s almost an insult,” said Cheryl Costa, a wealth manager outside Boston.
Nor should savers count on an improvement anytime soon.
The Federal Reserve has signaled that it expects to keep interest rates near zero for the next couple of years, as it manages the economy through the pandemic and its aftermath.
That’s good news for borrowers. Mortgage rates are at historic lows, dropping below 3% for both 30-year and 15-year fixedrate home loans this month, according to Freddie Mac. Even interest rates on credit cards have fallen slightly, though they remain in the double digits since that debt isn’t secured by collateral, like a house. The average credit card rate is 16%, a four-year low, according to Bankrate.
But some Americans have accumulated cash reserves during the economic uncertainty of the pandemic.
The personal savings rate spiked to a record 33% in April and was still almost 18% in July, double what it was throughout 2019, according to the federal Bureau of Economic Analysis. (The bureau defines personal savings as income left over after people spend and pay taxes.)
It can be demoralizing to salt away cash only to see it earn anemic interest. But it’s important to keep in mind the purpose of the money you’re holding, said Malissa Marshall, a certified financial planner in Vermont.
If the funds are meant for a rainy day, making as much money as possible isn’t the primary goal. “It needs to be sitting there, if you have an emergency,” Marshall said.
Other funds that you expect to use within the next year or two — say, for a down payment on a home — should also be kept in a low-risk account even though they are paying low rates, she said.
Online banks typically pay higher rates, but still aren’t paying anywhere near the 2% interest they offered last year. Now, their rates are typically below 1%, even on so-called high-yield savings accounts. Ally Bank is offering 0.8% on its savings account, while Capital One is offering 0.6%.
Certificates of deposit, which lock in a rate for a fixed period, aren’t much better, and you’ll typically pay a penalty if you take the cash out early. Marcus, Goldman Sachs’ retail bank, is paying 0.85% on a oneyear CD.
If you really want to earn more, you may have to take on extra risk. One potential option to consider are “ultra” short-term bond funds, which invest in a mix of government bonds and high-quality corporate debt with terms of one year or less. But it’s important to know that they aren’t risk free.
“Yes, you’ll get a higher rate,” Costa said. “But there is the possibility of losing some money.”