Perhaps a better question than why banks pay so little on savings is “Why do so many people keep savings at such low rates?” I think the simplest answer is “Because it’s so easy and safe.” But mostly nowadays that answer is that people just don’t think about what that might mean in real dollars and cents.
So why do banks pay so little?
Using a bit of circular reasoning, the answer is because they can get away with it. At least until more people decide to pay attention and move money to higher-paying investments.
But many see low-earning bank savings accounts as safe investments, especially those that are FDIC insured — and that’s a majority of U.S. banks. You can sleep better knowing up to $250,000 of your money is protected if a bank fails.
And banks know that too. So they see no need to offer their customers more tempting savings account rates. Especially the brick & mortar long-established banks.
So where can you put your money instead?
It depends on how much risk you can tolerate. One of the least risky investments, money market funds, also may not pay much. Though in higher interest times, their rates can be pretty nice.
Still for anyone who puts safety first, this may be the way to go at any time. And they’re FDIC insured if the institution is. Banks also offer CDs, not always the highest paying either, but better than savings — though not as readily available if needed.
What if you want to earn more?
This post will help you sort through some alternative options. And you don’t need to pick just one. In fact diversifying is always a wise way to go when investing:
⇒ How Banks Make Money From Your Savings
So what about YOUR choices?
If you are choosing low, low bank rates, I’d like to spend some time on why you’re settling for so little for yourself. And why you don’t take more control of how much your money grows.
Some possible reasons:
- You prefer zero risk.
- Change is scary.
- Your parents did it this way.
- Finance & numbers are hard to think about.
- You didn’t realize there were other options.
- You haven’t thought about compounding (and should).
Most people want to protect their hard-earned money. So I get why someone would go for the lowest risk investment they can find. But if your savings don’t keep up with inflation, then that may be a bigger risk — not enough future money when needed.
Higher interest rates also help you accumulate more money for that higher interest rate to compound each time. While really low ones (like when banks pay so little) may be not much better than a piggy bank.
I think it always pays to at least explore your options. And create a balanced investment portfolio that leaves you with readily-available funds as well as a mix of higher paying, good quality varied-risk options.
It’s your money. Help it work for you!
More posts to help
Banking Basics 101: Answers to Your Banking Questions
Basic Financial Terms: Know Your Finance Lingo!
Credit Basics: What Do All Those Credit Terms Mean?
When To Use Saving To Pay Off Loans (And When Not)
Opportunity Cost Examples: What Is Opportunity Cost?
Retirement Math: Why Saving Money Now Matters So Much
Why Should I Invest? Stock Market Is So Unreliable!
Why Does My Mutual Fund Pay a Dividend?
Saving Money Is Hard. I Feel So Deprived!
HELPING YOUR MONEY GROW
Tips for Investing Money
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