Customers who established savings accounts used to receive interest, canvas totes, and plush lions from their banks. Plenty of it.
Those times have passed. The FDIC estimates that the average savings account currently yields an annual interest rate of roughly 0.45 percent. Rates for savers are obstinately low while banks charge borrowers ever-higher rates: The interest rate that banks charge their most creditworthy customers, known as the prime lending rate, is at 8.5 percent, the highest level in the last 20 years.
Interest rates on savings accounts typically fluctuate in tandem with the prime rate. Banks can compensate depositors more generously the more money they make from borrowers. Banks typically react to rate increases from the Federal Reserve by increasing the interest rates on their “high-yield” savings accounts.
However, throughout the past 18 months, that system has malfunctioned. The Federal Reserve boosted the benchmark Federal Funds Rate to a two-decade high of almost 5% from practically zero. Banks declined to do the same.
Managing director of Procyon Partners in Connecticut and certified financial planner Jeff Farrar stated, “The banks have not kept up.”
Why not make an effort to draw in new clients and their cash?
because deposits at large banks are plentiful. That is due in part to the national stimulus effort and the pandemic, which pushed people to save. Inertia among consumers also plays a role. Bank clients are largely steadfast because they have faith in the major names.
Clients don’t switch savings accounts.
According to Ted Rossman, senior industry analyst at Bankrate, “we found that Americans have had the same checking account for 17 years, on average.” Banks are well aware of this. It’s an extremely “sticky” industry.
According to Rossman, large banks like Citibank, Capital One, and Bank of America “don’t compete on rates.” On national advertising campaigns, they compete. Stadia are named after them.
According to a 2023 Bankrate poll of 3,674 persons, just one out of every five savers received an interest rate of 3% or more, he added. “Moreover, 3% is a fairly low bar.”
He stated that savers might do better. People can park their money and earn 4% or even 5% interest in a number of ways available on the present market. That’s an extra $400 or $500 year on a deposit of $10,000.
Certain alternatives allow investors to take money out whenever they want, just like a regular checking account. Some demand that the money be left untouchable for several months or perhaps a year.
Rossman stated, “We’re talking about the best savings rates we’ve seen in a long time.” “A great deal of people could be performing much better.”
Older Americans recall a time when banks offered premiums, privileges, and substantial interest in an effort to compete for their savings. When the prime rate shot into double digits in the Reagan ’80s, rates on regular savings accounts hit 8%.
In comparison, savings accounts have yielded less than 1% annually on average since the Great Recession. The Federal Funds rate, which has essentially been zero for the majority of the previous 15 years, was reflected by those rates.
This information might help to explain why so many people have little bank savings accounts. The most recent statistics from the government Survey of Consumer Finances shows that in 2019, the average American family had only $5,300 in savings, checking, and money market accounts.
That being said, the good news is that you can easily get higher interest rates with a few clicks.
Examine the top-rated savings accounts with high yields.
Numerous offers for bank savings accounts with yearly interest rates between 4% and 5% can be found with a fast internet search. Regular roundups are available from WalletHub, Motley Fool Ascent, and other sources.
Several offers originate from banks that aren’t very well-known: AFB. Direct from the Valley. Revel in it.
“The majority of people are unaware of these,” stated Rossman. “But that’s alright, because they’re all covered by the FDIC.”
Up to $250,000 per depositor, per bank, is covered by the government. Your money should be safe as long as the offering bank is supported by the FDIC, according to experts.
Numerous high-yield accounts are located in online-only institutions. It is not possible to meet with a teller by driving to a branch.
If you are reluctant to change, you might want to create a new high-yield savings account and keep the checking account you have had for the past 17 years.
According to Rossman, “you can open one of these accounts, seriously, in just a few minutes online.”
The money market account is the first. With support from the National Credit Union Administration (NCUA) and the FDIC, banks and credit unions offer them. They could not allow you to transfer money in and out as readily as savings accounts because they are typically less flexible.
During the low-interest years, money market accounts were extinct, but not anymore. Competitive interest rates fall between 4% and 5%.
According to Carmel, Indiana-based financial advisor Ed Snyder, “they’re kind of a step above a savings account.” “Still very liquid,” denoting an ease with which money can be changed into cash.
If a saver doesn’t anticipate taking their money out anytime soon, they may want to think about certificates of deposit. Banks provide FDIC-backed CDs at rates that are quite appealing. The depositor agrees to leave the funds in the bank for a predetermined period of time, such as a few months, a year, or ten.
In the past, banks would typically give their clients better rates on CDs with longer durations. And yet rates in 2023 work in favor of the shorter-term investor. Investors anticipate lower interest rates in the long run, which is why short-term rates are high.
According to experts, the fact that nearly none of these solutions involve risk is what makes them so alluring.
“The labels don’t matter,” Papadimitriou reassured. “Put your money where you can obtain the maximum interest rate, whether it’s a money market account, savings account, CD, or checking account.”