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How Can We Save When Interest Rates Are Still Very Low?

While the jury is still out on the effectiveness of the Federal Reserve’s loose monetary policy, it’s clear that savers are hurting big time. The average savings account pays just under a quarter of a percent per year and it’s even less for money-market funds. Furthermore, the yield or return on savings accounts is actually negative if you account for inflation which is now at roughly 4%.

best-savings-accounts-for-2012Online Savings Accounts & Local Banks
Online banks with minimal overhead are able to offer higher yield savings accounts than most brick and mortar banks. Leading the way is Discover’s online savings account at 1% APY, followed by American Express & ING at 0.90%, and then Ally Bank (formerly GMAC) at 0.89%. How does this translate into dollars? If you initially contribute $5,000 into a 1% interest bearing savings account and add $50 every two weeks, that would translate into $419 in interest income over the next five years. CDs offer slightly higher yields which may make sense if your time horizon is greater than three years. However, those financial products typically include long lock-up periods and a penalty for early withdrawal which isn’t recommended for emergency cash.

Outside of the online banks there are not too many other attractive savings account options, except from a few local banks. If you live in Massachusetts or New Hampshire, Washington Savings Bank offers a 1.50% APY but you need to open a checking account first. Those in the Pennsylvania and Ohio area may want to consider Dollar Bank which offers 1.50% APY but checking is also a requirement. If you live in Minnesota with children under the age of 18, a lesser known bank called Ultima, offers a whopping 2% for a SMART (student-related) savings account.

Reduce Credit Card Debt
Those with credit card debt should focus on paying it off since the interest rates on borrowings of 10-20%+ is cutting into savings. Start by making your largest payment on the credit card balance with the highest interest rate as this will reduce the amount of interest you pay over time. In fact, you can even make minimum payments on your credit card balances with the lowest interest rates while you focus on paying off the most expensive card. If the rates are the same or very similar across credit cards, focus on paying down the card with highest balance. Also, consider transferring your credit card balance to a new issuer. Lastly, don’t forget to ask your credit card issuer to lower your interest rate.

More Personal Finance Questions? Browse answers or ask banking questions online.

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