You hop online and hit your bank’s website. Signing on to pay bills, you glance at your balance. You do a double take. Your savings account hardly seems to be growing. In fact, you could do about as well if you hid your savings inside your mattress. What gives?
There are a few possibilities. The lack of growth could be due to the current state of banking. It could also be a result of your actions. And, just maybe, it’s a bit of both. Here are three reasons your account’s not expanding as it should be.
Decreasing Interest Rates
Interest rates aren’t what they used to be. A decade ago, your savings account might have collected 4.5 percent annually. Nowadays, 1.05 percent is considered high. Most savings accounts’ interest rates are barely above zero. None of these figures are impressive. How much difference does the highest rate make over the course of the year? Check this out:
- In 2006, $25,000 in a savings would earn you over $1,100 in interest.
- If you’re lucky enough to get the top savings rate today, that same amount brings in just over $260.
Big difference. So now you’re probably asking the next question: “Why have interest rates dropped so much?” It’s because of the way banks function. They must keep some cash on hand. Where does that come from? Not bankers’ pockets. The funds come from deposits … but checking accounts aren’t key. That money flows in and out too fast.
Savings accounts are a more reliable, stable source. You put money into the bank, and the bank then makes loans to customers. You receive a small percentage of interest on your deposit as a kind of “thank you.”
Low interest rates are tied to interest rates on loans. For instance, back when mortgage rates were over six percent, savings accounts were earning four percent. But mortgage rates have dropped to less than four percent. Banks need to make a profit, so to make up the difference, they offer lower savings rates. That’s the thanks you get now.
Naturally, the follow-up question is: “Why are current mortgage rates so low?” Blame the Federal Reserve, the American central banking system. The Fed sets the rates at which banks may borrow both from each other and the Fed itself. When the economy is flagging, the Fed lowers these interest rates. That way, banks can offer consumers better loan rates. This helps keep money moving. But as loan rates drop, savings interest rates do, too. But don’t you feel better knowing that borrowers have it a little easier? No?
If your interest rate is next to nothing, you could look for a better deal at another bank. Some of the best rates are from online banks or online departments of brick-and-mortar banks. Be sure check for any conditions tied to high-yield accounts, such as minimum balance, maintenance fees, and limitations on electronic transactions, ATMs and mobile devices. It doesn’t hurt to shop around. Who knows? You might be pleasantly surprised.
You Didn’t Make Regular Deposits
Some savings accounts don’t grow because consumers don’t make regular deposits. Account holders add to savings whenever they have “leftover” money, which isn’t often. After paying bills and engaging in additional spending — entertainment, travel, eating out, whatever — your paycheck can easily disappear. Nothing’s left to save.
To counter this effect, make a regular savings deposit when you pay bills. Then see what’s left over for extras. Better yet, find out if you can set up an automatic savings account deposit from work. It may not be as fun as spending, but you’ll get that warm glow when you see your savings mount.
It’s Savings, Remember?
Some account holders seem to forget it’s called a “savings” account. They freely make withdrawals, often transferring money right into their checking accounts. Savings should have a specific purpose, such as a rainy day fund, emergency repairs for home or car, or tuition costs. If there’s no reason to save, you’re less likely to hesitate before pulling money out for something you want right now. The incredibly general goal of “saving” is not very tangible or meaningful.
But with a specific long-term goal identified, you know that any withdrawal negatively impacts your target. Expensive concert tickets might lose a bit of their appeal if you know they’ll pull away from a house down payment or dream vacation. Savings shouldn’t function like another checking account. If you have trouble breaking this habit, considering a savings account that limits the number of monthly withdrawals you’re allowed to make.
Take a look at your bank’s practices as well as your personal habits. What’s the deal? Where’s your money going? Then, if you really care about your savings account — and why wouldn’t you? — it’s time to make some changes.