What's the Point of Saving with Low Interest Rates?
It seems like everyone agrees that saving, just like broccoli, is good for you, even though it's no fun. Still, some may ask, what's the point?
Everyone takes for granted that saving part of your income is an essential step toward financial wellness. However, it's a little like the adult equivalent of your parents telling you to eat your vegetables when you were little. It seems like everyone agrees that saving, just like broccoli, is good for you, even though it's no fun. Still, some may ask, what's the point?
"Modern-day savers may be a bit frustrated."
Modern-day savers may have a right to be a little bit frustrated. After all, savings accounts don't offer the same level of returns as they used to. As Trent Hamm of The Simple Dollar pointed out, as recently as 10 years ago, it was a different story . Returns on the average savings account at the end of 2005, according to the National Credit Union Association, were around 0.5 percent APR. Today, according to the Federal Deposit Insurance Corporation, they are much lower, around 0.06 percent on average for accounts with less than $100,000. Hamm noted that accounts from some boutique firms were as high as 5 percent in 2006, while today, any savings account with more than 1 percent returns is exceedingly rare.
This isn't to say that banks are taking advantage of the average consumer, Hamm explained. Rather, low rates on savings accounts are just a symptom of a larger economic reality. Since the economic downturn eight years ago, the Federal Reserve, which controls the monetary policy of the U.S., has worked to encourage investment by setting low interest rates. Although the Fed does not directly control the rate of returns on consumer savings accounts, this policy allows banks to borrow money cheaply from the government. With the ability to do so, there is less of a need to incentivize savings account deposits, and thus, interest rates on these accounts are lower.
Saving makes sense
This is a drawn-out way of saying even though interest rates are low now, they may not be for very long. Once the Fed decides that economic activity has improved enough, rates will go back up, and it will suddenly become a better idea to save via these vehicles. However, that doesn't mean that you should stuff all your money in a shoebox under the bed, nor would it be wise to invest your life savings in the stock market. Instead, as Bob McTeer writes in Forbes, you should keep on saving regardless of how much you get out of it. That's because the real value of a liquid savings account is the security and peace of mind it offers.
In addition, when interest rates on savings accounts do go up, as McTeer explained, so do the rates consumers pay on credit cards and other loans. With more money to be spent, it's just another incentive to keep saving and ensure your money is secure. Aim toward a sizeable emergency fund, no matter what the interest rate is, and you'll find that the convenience of a bank account will be worth much more than the monthly dividend pays.
For more information on the right savings plan for you, talk to the professionals at Vectra Bank.