For Those of you keeping score, that’s 9.2 trillion dollars.
I saw an article the other day that said that Americans had 9.2 trillion dollars in savings accounts. A lot of that money was in the big banks such as, Bank of America, Chase, Citi and Wells Fargo, to name a few. I looked up the interest rate that was being offered by one of these banks and it ranged from .01% to .05% APY. That means, if you had $1000.00 in one of their savings accounts, at the end of the year, you would have $1000.10. Plus, some of these banks charge a fee if you don’t maintain a minimum balance. That’s adding insult to injury!
Why do people even have savings accounts?
Savings accounts are safe, convenient and easy to set up. They are good for things like an emergency fund, overdraft protection, saving for a short term goal like a down payment or even creating some financial discipline. If you need the money very quickly, it doesn’t really matter what amount of interest you are earning. But it seems to me like a lot of money is sitting in savings accounts at banks for quite a long time and basically not earning much interest at all. Here are a few options available in today’s low interest rate environment.
Three Savings Account Alternatives
- Certificate of Deposit (CDs)
A certificate of deposit is a type of savings account that accrues a fixed amount of interest until a fixed withdrawal date. Generally, these will pay a higher amount of interest that the typical savings account. I looked online and saw interest rates ranging from 1.00% to 1.05%. Using my $1000.00 example, at the end of the year, you would have $1010.00 in your CD. Not super exciting, but it is better than the 10 cents you earned on the savings account.
CDs have several pros as well as cons. On the plus side, you’re earning a bit more interest. Because of the fixed withdrawal date such as a 1 year CD or a 3 year CD, it reduces the temptation to take the money out. On the downside, if you do need to take the money out of your CD prior to the end of the time period, you will generally be charged some kind of penalty. Different banks have various ways to figure out the penalty for early withdrawal, so you need to check your bank’s policy to figure it out.
- Online Bank Savings Accounts
Online banks tend to offer higher interest rates than their brick and mortar contemporaries. They don’t have the overhead costs and are able to offer higher rates of interest. They also want to attract your money so they tend to offer higher rates than the local bank. Again, looking online, I saw rates ranging from .80% to 1.05%. That means at the end of the year, my $1000.00 would have grown to between $1008.00 - $1010.05.
In addition to higher interest, the online banks often don’t require a minimum balance and have lower fees than the brick and mortar banks. On the downside, you need to be a little bit more technologically savvy to deal with the online banking and you can’t just drop into a branch because there isn’t one.
- Other Options
Admittedly, this is not a list of every option for places to put your cash. The two options above would be considered cash equivalents. I have seen the terms cash and near cash, frequently used. Everybody needs a holding account for cash outside of their checking account. Savings accounts, CDs, online banks savings accounts and money market accounts are all viable alternatives. Each one has its pluses and minuses.
You work hard for your money. I believe your money should work hard for you. If we have learned anything from 2020, it is having cash is king. Why not earn a little bit of interest on that cash versus having it linger in savings accounts earning next to nothing? If you want to explore some of your options, feel free to reach out to me at kbrown@gatewayfinancialadvisors.com. Thanks for reading. KB