Why Are Savings Account Rates So Low?

Why Are Interest Rates So Low?
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In the last few years, savings accounts and CD rates have been below one percent. There were times when you could expect to earn around two percent or more on the money you left in a savings account. CD rates were even higher, and you may have been able to earn five percent or more. The current savings accounts rates are so low that they are not keeping pace with inflation. When you are saving money, it may be frustrating to realize that your bank is not giving you a very high rate of return on the money that you have with them.

Even CD rates are very low.

How Are the Interest Rates Determined?

Banks set the rates based on the interest rate provided by the Federal Reserve. The bank is required to have some money on reserve in deposit accounts to balance out the number of loans that the bank gives out. The Federal Reserve sets the rates to help prevent inflation, deflation or a long-term recession. When they are not earning a high interest rate on the money they are lending out, the banks cannot offer you a high interest rate on the money that you have in the account. While you may be celebrating the lower interest rates on mortgages and car loans, they are negatively affecting the rates that you are getting on your savings accounts through the bank.

How Can I Earn More Money on My Savings?

If you have money that you want to at least keep pace with inflation, you will need to look at other investment and savings tools.

Annuities, mutual funds and other investments will likely do a better job of keeping pace with inflation. However, there is a bit more risk involved with the investments. You should talk to a financial planner if you are concerned about moving your money to this type of account. When you are serious about building wealth rather just saving money, you will need to put your money into someplace other than a traditional savings account.

If you choose to invest, you should be sure to have a reserve that you keep separate from your investments in case you need to access money quickly. It can take time to sell your stocks and pull your investments out of the market. 

What Do I Do With My Short-Term Savings?

Your emergency fund, and short term savings, such as for a down payment on a house need to go into a savings account or a similar type of account through your bank. If you plan on accessing the money during the next five years, it is best to keep it in a savings account to keep the money safe when you need it. A five-year turnaround time is not enough time to allow the market to recover if you need the money. If you want to earn a better interest rate than a standard savings account, you may consider using a money market savings account, a CD (Certificate of Deposit) or using an online savings account to store your money. The online savings accounts can offer a slightly higher interest rate because of lower overhead costs.

While it can be frustrating to have the lower interest rates with savings accounts, it is a trade off for the security of the money. The FDIC will guarantee the first $250,000 that you have at the bank.

This means you will not lose the money even if the bank were to close down. Putting your emergency fund into this type of account will protect you. It will also make it easier to access those funds when you need them.

What Should I Do About My Long-Term Savings?

Once you have funded your emergency fund and savings goals, and you want to build wealth, you will need to look at other investing options. There is a difference between saving money and investing money. When you save money, you are putting it aside to cover a rainy day. When you invest money, you are putting it to work for you to help you build wealth. Putting your money into a basic savings account will not help your money to work for you. This realization will help you make wise financial decisions.