Why Savings Account Rates Suck Right Now

You may have noticed it’s dang hard to get a good rate for saving money right now. Used to be you could get an online savings account with 5%, no problem. Now if you can get in the upper 1% you’re doing pretty good. So what’s the dilly?

New York Times’ Ron Leiber takes a look and lists seven reasons. The most important: banks are taking a bath on their loan portfolios and buying bonds instead, leaving a lot less cash available to lure in more savings capital.

This also means that savvy penny pinchers who put chunks in online savings accounts during the boom years could be in store for a comeuppance. If they also sneered at homeowners suckered into sub-prime loans, they themselves were also benefiting from some of the same gravy sloughed off by the fraud-driven lending bubble.

Why Savings Account Rates Are So Pathetic [NYT]

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  1. dragonfire81 says:

    So if savings accounts are a no go, where’s a decent place to keep my money and get some kind of respectable ROI?

    • areaman says:

      High quality commercial paper, muni bonds, and treasuries.

    • pecan 3.14159265 says:

      Savings accounts aren’t really a “no go” – something is better than nothing, right? I’ve got 1.3% right now, I think, and that’s better than no interest at all. A long-term CD offers a higher rate, but you shouldn’t lock all of your money into one account anyway, so savings is still a very good option if the alternative is checking (which is either no interest or very little) or mattress (which is definitely no interest).

      • partofme says:

        Mint had an article not too long ago pointing out that most CDs have very favorable breaking terms. Most charge 2-3 months interest to break a CD. Then, do the math. I did the math with the rates/terms my credit union had. Once I made it through six months, it didn’t matter when I broke it, I would come out best by choosing the longest-term CD. I used to think of a CD as really locking my money away, but it’s not. If you have an emergency fund (like everyone says you should), it makes no sense to have it anywhere but a long-term CD. It’s still covered by FDIC, you can access it if necessary with for just a tiny fee, and if you don’t have an emergency, you’re making a lot more interest than a regular savings account. Another thing you should pay attention to is your bank’s minimum deposit for the CDs. You may be able to break a deposit up into multiple CDs so that if a minor emergency occurs, you won’t have to pay a penalty on the whole amount.

        • Not Given says:

          I think you only lose the penalty for the amount you take out. You have a $10k CD and your emergency calls for $2k, the penalty is only on the part you draw out, right?
          If you have lots of money you should spread it out so you have another CD mature every few months.

          • partofme says:

            I don’t know on this. The terms of mine doesn’t talk about this specific situation. It simply says that you can withdraw dividends without penalty, and then gives the penalty as 90 days interest on the original principle for an early withdrawal, not in the case of dividends. My bet is that you have to break the whole CD, though I might be wrong. This might be different with different banks and different terms. I don’t worry about this much, because I’m too poor to have huge amounts in a single CD. And yes, your idea of rolling CDs is good if you have a lot of money.

            My major point is that even without tons of money, CDs might be a nice secure place to get a decent ROI (at least better than letting your emergency fund sit in a regular savings account). You can play games to make your specific situation even better, but don’t overlook them under the reasoning of “my money would be stuck there”. It’s really not.

      • longdvsn says:

        Well…something is better than nothing. But the problem is that by keeping money in a savings account right now, you’re actually losing money to inflation. But yes!, 1.3% is better than keeping it under your mattress.

        While it’s important to keep money saved in case of emergency, or saving for big ticket items…if there’s something you want to buy and you currently have the money to buy it (this is key) – might as well purchase now because your money might not buy the same product in a year.

    • Necoras says:

      The stock market is doing fairly well, particularly since September (Dow is up roughly 10%). If you can handle the risk, taking advantage of that is an option. I’d suggest having a liquid savings account for emergencies (I keep a few grand in an Ally account). If you’re looking more long term, you can always add to a retirement vehicle such as a 401K or IRA.

    • Willie T says:

      I would look around for a NOW or Money Market account that pays interest on your balances, banks and credit unions in my area pay anywhere from 3.5-5% depending on balance and use of their debit card.

    • hansolo247 says:

      Plenty of stocks at a P/E of around 10 and a 3% dividend yield. Upside potential, and 3% even if it goes nowhere.

      A P/E of 10 isn’t overpriced, either, so the risks of it dropping significantly aren’t all that great.

  2. AmateurD says:

    Which begs the question, is there a better alternative to savings accounts without having to lock your money in long term?

    • Cameraman says:

      1) Mattress
      2) Sock
      3) Tin can buried in backyard

      You can also invest it in things like cigarettes, alcohol, and prostitutes.

    • areaman says:

      High quality commercial paper, muni bonds, and treasuries.

    • Bibliovore says:

      Look around for high-interest checking accounts in your area. I’m getting 4% on mine, with no minimum balance, and I’ve seen up to 6% in other states. My “high interest” savings account is at 1%, so most of my savings are now in my checking account.

      Many higher-rate checking accounts require meeting some conditions each month. For mine, most of them I’d be doing anyhow — direct deposit, at least 10 debit/credit (doesn’t matter which) transactions each month, and paying at least one bill online. The weird one is to not write any paper checks, but as the bank also offers a free basic checking account and free instantaneous online transfer between accounts, I got both accounts and can still write the rare paper check when I need to, such as for girl scout cookies.

    • jesusofcool says:

      Asking the same question myself. Maybe a good article idea Consumerist?

  3. DanRydell says:

    I like how the NYT article listed seven significant reasons, which you boiled down to a “short answer” that was one of those reasons.

  4. jbandsma says:

    Our rate on a savings account recently DROPPED from 0.03% to 0.025% With about $10,000 in the account, we don’t even make enough on it to be required to report the interest on our income tax.

    • wrjohnston91283 says:

      Yes you do. You don’t make enough for your bank to issue a 1099-INT, but you’re still required to report the interest.

      • jbandsma says:

        On a simple form ours asks if we had interest over $50 for the year. If no, skip to (whatever the next number is)

      • s73v3r says:

        There’s a minimum level, really low, to where if you make less than that, the IRS decides its not worth reporting. You can if you want, but it doesn’t matter.

  5. u1itn0w2day says:

    I always thought one of the driving theories behind a bank was that they make more money on what they loan out than what they give on interest rates. So how come the interest rates suck when their unsecured loans are over 20% and many student loans and mortgages are over 6%. But 1% for you???

    • edosan says:

      If your mortgage is over 6%, you should have refinanced years ago.

      • u1itn0w2day says:

        We’ll slash a refied mortgage to 3% so a theoretical average of secured and unsecured loans is about 11% even if they give a 1/3 of that back to the customer that’s better than 1/10 of that going back.

        Anyone who uses a savings account has basically given the bank a really cheap loan.

      • Mama Mayhem says:

        We can’t because of a combination of foreclosures and a house that sold in our area that was the shell of a home (there was a fire and they sold it as is). Refi isn’t an option when you are under water b/c of the irresponsibility of others.

    • econobiker says:

      Because they cannot screw customers with $35 over limit fees and other~negative activity~ profits…

  6. dolemite says:

    I remember back when Paypal was paying 5% exactly on their accounts. Now…its .11%. So, 1/50 of what it used to pay?

    • howie_in_az says:

      When I opened my HSBC account I was earning a cool 5.05%. Now every time I get an email from HSBC I cringe — the last email said my account was now earning a not-so-cool 1.00%.

    • jesusofcool says:

      I had an ING online account earning over 5%…now it’s getting just over 1%. Glad I read this article though because I had no real idea why.

  7. Supes says:

    Rewards checking accounts are still doing okay, if you’re careful to meet the requirements for getting the higher interest.

    As for savings, you’ll have a hard time getting above 1.75%…. maybe some local credit unions, but not easy to find. So many rates have dropped in the past 6 months.

  8. Thorzdad says:

    They forgot the real reason…The financial industry doesn’t actually want consumers to save, despite all the hand-wringing and homilies to the contrary.

  9. Thyme for an edit button says:

    At least I have my free checking for life… oh, wait.

  10. malraux says:

    Woot! My checking is still paying 3.75% and my savings account is paying 2.00%. (In answer to the obvious question, the checking account only pays 3.75 on the first 15k.) Go local banks.

    • One-Eyed Jack says:

      We’re fortunate that our bank has a “Sky High” checking option that’s paying right above 4% now, and has been for the past few months. We do have to jump through some hoops to get the rate, but it’s stuff we are doing anyway (using the Visa check card a certain number of times a month, have a direct deposit, stuff like that).

  11. jcargill says:

    Yet CC rates continue to climb…as do fees.
    Banks lose nothing…ever.
    If they’re threatened, we’re ordered to bail them out.
    Nice deal…for them.

    • u1itn0w2day says:

      The too big to fail excuse but not too big to take any signifigant competition out of the picture.

  12. human_shield says:

    Lure people in with high interest rates, then cut them down to nothing. Who didn’t expect them to do that anyway?

  13. hansolo247 says:

    They can borrow all they want from Ben Bernanke for 0%.

    THAT is why they don’t pay interest.

    • peebozi says:

      yea, invest their billions from bernanke at 2% guaranteed or at 25% with risk…as a banker, they have to go with the free (risk & interest free) money. bankers are the scum of the earth.

  14. peebozi says:

    What’s wrong with 1-2% interest? The banks received BILLIONS in 0% loans and simply stuck it into taxpayer guaranteed treasuries that paid 1-2%.

    1.5% of $100,000,000,000 is a $1,500,000,000 gross profit…I don’t see the problem here.

  15. aleck says:

    Do a 10 second Google search for “High Yield Reward Checking Account”. I am getting 3% now, many banks offer up to 4%.