When Will Saving Money Be Worthwhile Again?

by Kevin on May 26, 2013

Do you remember the days of truly high-yield online savings accounts? “High-yield” online savings accounts still exist, but they are paying paltry amounts of interest.

No, back in the good days of saving money you could earn 4%, 5%, or in some cases 6% on your money.

There were no hoops to jump through. You just opened an account, deposited your money, and watched the interest roll in.

Those days have been gone for a long time. So long that I begin to wonder if they will ever be returning.

What Happened to Saving Account Interest Rates?

Before the financial crisis, housing bust, and Great Depression interest rates were much higher on everything. Saving account rates ran 4% to 6% online while mortgage rates were 5% to 8%. As the economy began to fall apart the Federal Reserve lowered, lowered, and kept on lowering their rates which in turn brings rates down across the entire economy.

Since then the economy has been okay, but not enough to justify raising rates. (Raising rates too quickly could kill a recovering economy.)

It’s a fine balance between raising rates too quickly and taking too long to raise them. In the meantime, savers are caught in the middle with inflation eating away at the spending power of their deposits and little to no interest to help offset inflation.

Where to Find Yield for Savings

If you are like me finding a new place for better yields on your deposit would be a welcome thing.

Reward Checking Accounts

The best place I’ve found thus far to amp up my interest rate on my deposits is reward checking accounts. I’ve written about them a lot, and for good reason. The account works like any other checking account: you get a debit card, you can write checks, and you set up direct deposit.

The good part is if you meet some really basic requirements like swiping your debit card 10 times per month and logging in to online banking, you get a much higher interest rate up to a certain dollar amount. So you might get 2% interest on $15,000 or 2.25% interest on $25,000.

Any amount of money deposited above the cap (such as $15,000 or $25,000 in the above examples) gets a normal, miniscule amount of interest or none at all.

Overseas Saving Accounts and Certificates of Deposit

A much more risky option – that I do not recommend – includes overseas saving accounts and certificates of deposit. Some institutions in places like India are offering 5% rates for you to deposit money with them.

While you aren’t breaking any laws depositing your money overseas, there are far too many risks for this to be a good idea. The biggest risk: you have no FDIC coverage so the bank can disappear and you would lose everything you had deposited.

Other Investments

Of course you can seek higher yields by taking on additional risk. Bonds, stocks, or peer-to-peer lending can generate higher returns for you, but these investments are not in the same category as a savings account. Savings accounts are essentially a risk-free return as long as you stay under the FDIC coverage limit. You have no guarantee of your capital that you invest in stocks, bonds, mutual funds, ETFs, or peer-to-peer loans.

Saving Money is Worthwhile

Even with interest rates making saving money seemingly worthless there is still significant value in saving money. Having an emergency fund that can cover your living costs for 12 months if well worth it even if inflation eats away 3% of its buying power every year.

Saving money is worthwhile… it’s just that right now it doesn’t pay very well.

{ 1 comment }

Free Money Minute May 26, 2013 at 7:03 am

I have a feeling those times will come back again in a few years. It is hard for me to believe inflation will not come along with it. Look at the early 80’s when we had super high interest and inflation rates after the recession. I agree, keep saving. It is better to make just a little than to pay others interest.

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