Why Savings Accounts Are Important, Even When Rates Are Low
Savers should consider risk, liquidity needs and the full gamut of deposit products as they tune up their financial plan.
If you’re the proud owner of a savings account, then perhaps you received notification this year that your interest rate would be changing — and not for the better. You may have even shopped around and noticed that interest rates were lower across the board for all savings products. While lower savings rates may not be welcome news, it’s not a cause to give up saving altogether, either.
Consider that, according to a 2021 SaveBetter survey analyzing consumers’ savings behaviors, twice as many Americans moved money into savings accounts than out of them during the pandemic — a time when interest rates were not exactly a draw. It’s a clear sign there’s more to the value of your savings account than interest alone.
If you’ve been wondering whether it’s worth keeping your money in a savings account, then here’s what you should know.
Why savings are important, even when rates are low
Cash savings help manage risk
When interest rates on deposits are low, you may be tempted to empty your savings accounts and pour everything into investments instead. While investments can be a crucial part of a long-term financial plan, it’s important to remember they also come with risk, including loss of principle — a near-non-existent concern when it comes to cash held in savings accounts at federally insured banks and other financial institutions.
We all need to plan for rainy days, and savings accounts ensure that your cash is there when you need it.
More flexibility and liquidity compared to securities, and no fees
Unlike investment accounts, which may have restrictions on when you can remove funds, have extended withdrawal processing times, or impose fees for removal, the money in savings accounts is generally more liquid and accessible.
Most savings accounts and money market accounts (MMAs) allow you to remove your funds within just days, sometimes even hours. And there are no fees to transfer your money.
Savings accounts are safe and secure
Savings accounts are a type of deposit account, which means you get the benefit of FDIC insurance. (All the financial institutions on the SaveBetter platform are FDIC insured.) So, you can rest assured that no matter what’s going on in the world, you’ll have government-backed protection on your money, up to $250,000 per depositor, per insured bank.
Why are interest rates low in the first place?
The interest rates on deposits offered by banks and financial institutions aren’t arbitrary numbers assigned to various types of accounts. They are actually influenced by actions taken by the Federal Reserve.
When Fed officials think the economy needs a boost, the Fed typically decreases what’s known as the Federal Funds Rate; this is the benchmark rate at which banks lend money to each other short-term. Why does the Fed do this? Because when interest rates decrease, this encourages people and businesses to borrow money and spend more, which, in turn, stimulates the economy. On the other hand, when the economy is viewed as strong, the Fed often increases borrowing rates to keep inflation in check.
Shortly after the Covid-19 pandemic struck the U.S., the Fed lowered its benchmark rate to near zero to help stimulate the economy — and the rates on savings products followed suit.
When will rates go up?
Of course, no one has a crystal ball that says exactly when rates will rise.
Interest rates have remained relatively low since early 2020. But Fed policymakers expect the Fed to begin raising the rates they set to help manage rising inflation in early 2022 and anticipate that rates may rise from below 1% and possibly reach 1% by late 2023. We may not see interest rates on deposits rise immediately when this happens, but historically one has followed close behind the other.
So, while relatively low interest rates may be with us for a little longer, there is reason to believe they may tick upward eventually. In the meantime, savings accounts are still well worth it, and part of a sound saving strategy. Here’s how to get the most out of your savings in a low (or even high) rate environment.
How to maximize your savings while rates are low
Compare products to discover competitive APYs
Annual percentage yield, commonly known as APY, is the total interest you can earn on a savings vehicle in one year. In a low interest rate environment, it’s especially important to find ways to maximize your interest-earning potential — and a higher APY will help.
If the traditional savings account you hold at your local bank isn’t cutting it, consider moving your money to a high-yield savings account (HYSA) instead. Traditional and high-yield accounts are essentially the same — they’re both liquid, have no or low fees, and offer various deposit and withdrawal options — but the main difference is how much you can earn.
For instance, according to the FDIC, the average interest rate for a regular savings account as of October 2021 is just 0.06%. But HYSAs, like those offered by SaveBetter’s partner banks, are currently offering rates close to six times the average. For even higher APYs, you can turn to MMAs and certificates of deposit (CDs), which typically offer stronger rates than standard and even HYSAs. Consider that an MMA offered through SaveBetter yields nine times more interest than does an average savings account, if you compare to the Fed’s October data.
Diversify your savings
Diversification is crucial for your investments, but did you know it’s important to diversify your savings, too? This concept involves splitting up your money according to your needs to take advantage of the highest savings rates of various accounts.
For example, money you may need in a hurry is well kept in a HYSA — they’re the most liquid type of savings because you can remove the funds quickly at any time.
Once you have enough savings for your immediate or short-term needs, you may wish to open CDs, which offer higher interest-earning potential. But keep in mind, CDs are designed for you to keep your money within the account for a set period, and APYs are fixed for the entire term. (Withdrawing funds early may incur a penalty.) So, when rates are low, consider choosing CDs with shorter terms or no-penalty CDs, which won’t lock your funds away too long in case rates begin to rise.
Avoid accounts with fees
When savings rates are minimal, a monthly maintenance fee on an account could quickly begin to cost you more money than you earn.
Look for accounts without fees or find out how you can get fees waived. For example, some providers let customers avoid maintenance costs if they maintain a certain minimum balance. (You aren’t charged any fees when you save through SaveBetter.)
SaveBetter can help you find competitive interest rates in a low-rate environment
SaveBetter lets you put your cash savings to work by giving you access to a curated network of banks and savings products, including HYSAs, MMAs (also known as money market deposit accounts) and CDs — all through one, unified login.
Again, all participating banks on the SaveBetter platform are FDIC insured, so you can rest easy knowing your deposits are protected up to the limits of federal law. Best of all, with SaveBetter, you don’t have to worry about fees eating into your savings — we never charge fees for you to save with us.
If you’re ready to make the most of your hard-earned money without the hassle of multiple accounts, then get started with SaveBetter today. Explore savings products available through SaveBetter.
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APY means Annual Percentage Yield.
Each customer authorizes the Custodian Bank to hold the customer’s funds in a custodial capacity in order to facilitate the customer’s deposits to and withdrawals from deposit accounts at various Product Banks that the customer requests through SaveBetter.com. The Custodian Bank does not establish the terms of the deposit accounts, or offer the deposit accounts to customers, and provides no advice to customers about deposit accounts. Central Bank of Kansas City, Member FDIC, d.b.a. Central Payments is the Service Bank. Custodian services are provided by Lewis and Clark Bank.