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Bank accounts have been a staple in the modern economy for quite some time. If you were going to have money, then you were going to need a bank to hold on to it. However, that may not be the case today as other incentives and alternatives begin to take prominence.
There are two types of banking accounts: checking and savings. The checking account is traditionally a low or no interest earning account while savings accounts generally have higher interest rates. Bank account holders make money from their savings accounts on payments from these interest rates. The higher the interest rate, the more money earned by the account holder.
In today’s economy however, both of these bank account types are characterized by historically low interest rates. This does not go unnoticed, and there has been a recent trend towards putting money elsewhere. So why did the interest rates on savings accounts drop, and what can you do now? Here are a couple of things to know when it comes to bank accounts.
Instead of only blaming the banks for lowering our precious interest rates, we need to look at the actual reasons for those actions. First, the interest rates on a bank accounts cost the bank money. When banks are making plenty of money, they can afford to pay more interest to their customers. So how do the banks make money? They make money off of interest from loans they dole out, such as personal loans, consumer credit expenses, and mortgages (especially mortgages). If the interest rates on those loans are high, then they can afford to increase the interest on savings accounts.
There is another factor to consider: the Federal government; for instance, the Federal Reserve attempts to control inflation which directly affects interest rates. How do they do this? The Federal Reserve is constantly lending money to banks at its own interest rate, and this interest rate highly influences the banks’ interest rates on mortgages and other loans. When the economy is down, the Federal Reserve loans out money at a low interest rate to banks who in turn loan out mortgages and consumer loans at a low interest rate. Until recently, that has been happening since the housing market crash.
Since banks make their money from loan interest, they cannot offer high interest rates on a savings account when they are currently offering low interest rates on loans. This is a direct result of the economy.
What to Do?
You may be thinking: what do I do now? If you want to make money from interest on a savings account, then you may need to change your approach. Since the savings account interest rate is dependent on the economy, you’ll need to wait for the economy to improve. Patience is the key here. The best route is to pay off high interest debt now. This debt is out of place in a low interest rate market, so it is going to be increasingly negative to your net worth as time progresses.
Waiting for the economy to improve might not appeal to many people. If you want your money to work for you, then banking with a low interest rate account is not going to cut it. Luckily, there are other places to put your money.
One classic way to get the most bang for your buck is to invest. Typically, the return on a successful investment is much greater than the return on bank account interest. There are plenty of ways to invest in things like stocks, mutual funds, index funds, and bonds which, for example, could be held within a 401(k), an IRA, or a taxable investment account. Are there any negatives to this? Yes, there are. Investing money comes with much less security than depositing money in an interest earning bank account. While banks and the Federal government guarantee your money, the stock market does not. So keep that in mind when deciding just where to put your savings!
Author: Jeff Gitlen