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When Do Savings Account Rates No Longer Matter?

POSTED ON BY

For much of this year it appeared we had reached the bottom of the interest rate cycle. It seemed like interest rates would stay low, but at least we wouldn't see many more rate cuts. That ended last month when the Fed made its mid-2013 pledge. We saw the return of mass rate cuts. With very low Treasury yields and with talks of QE3 and another recession, it does seem likely that deposit rates will continue to fall.

One thing banks should consider is that as they lower rates the interest rate becomes less important for depositors. When rates are so low, the differences in earnings shrink. Eventually, it's no longer worthwhile for a depositor to change banks just for the interest rate. Here's an example that demonstrates this.

The following example shows three cases with generic internet savings account rates from 2006, from today and from what they may be in the future. These are compared with generic brick-and-mortar savings account rates which are one-fifth the internet savings account rates. You can see how the differences in earnings shrink as the interest rates fall.

  • Example of rates in 2006
  • 5.00% with $10K for 1 year = $500 (+$400)
  • 1.00% with $10K for 1 year = $100
  • Example of rates today
  • 1.00% with $10K for 1 year = $100 (+$80)
  • 0.20% with $10K for 1 year = $20
  • Example of possible rates in the future
  • 0.50% with $10K for 1 year = $50 (+$40)
  • 0.10% with $10K for 1 year = $10

The intent of this example is to show that internet banks are becoming less relevant as interest rates fall. Interest rates that are 5x the national averages become less important as rates fall. If an internet savings account rate falls to 0.50%, the extra $40 in interest over a year on a $10K balance isn't enough to influence many people to open the account.

I'm sure internet banks are hoping their new banking features will be able to attract depositors. In my opinion, interest rate is still the main reason for people to move their money to an internet savings account. If rates keep falling, internet banks will suffer.

Poll Question

So in today's poll, the question is when do savings account rates no longer matter? What savings account interest rate is so low that it will no longer influence your decision about opening a new account?

For example, would you open a new savings account with a 1.00% APY? a 0.50% APY? or a 0.25% APY?

In the poll, select the rate that's too low for the savings account to be worth it for you.

  Tags: savings account

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Comments
44 comments.
Comment #1 by Anonymous posted on
Anonymous
They're already too low to matter. We've had major internet savings accounts drop below 1%. This surely isn't enough to keep up with inflation. Why bother. And, why use an internet bank anymore?

6
Comment #2 by Debbie (anonymous) posted on
Debbie
Just last week Compass called and surveyed us asking if we would recommend them to others and I told them, no, we are moving our funds to a local bank. I've been thinking about this as well and would say that I reached the point of where rates didn't matter about a year ago. Since then, I've been considering altrernative ways to benefit in a community sense.  At least there, it's benefiting my local economy and there's less risk of them playing games with my funds.  We did that in the recession of the 70's.  After nearly 20 years of banking there, Wells Fargo came in and bought our local bank; then started charging us $9.00 a month for a no-frills checking account. When we asked about grandfathering in our account, they said that we didn't have enough money for them to consider it.  So we went to a local bank and when things got better Compass bought them out. With their recent changes, it's time to move. I have to laugh at Wells Fargo's commercials today and how they brag about "being there" for families through the years. 

14
Comment #3 by Anonymous posted on
Anonymous
THE RATES ARE NO LONGER MEANINGFUL.

LIQUIDITY IS MORE IMPORTANT.

WHY TIE-UP CASH TO MAKE ENOUGH IN 1 YEAR TO BUY A CHEAP ****TAIL.

BETTING RED IN ROULETTE HAS A BETTER OUTCOME--AND THE ****TAIL IS FREE.

 

 

9
Comment #4 by Anonymous posted on
Anonymous
MY PHILOSOPHY IS TO STAY WITH A LADDER PROGRAM AND ALWAYS GO FOR THE HIGHEST RATE.  IF YOU CHOOSE THIS METHOD, THEN THE SMALL EXTRA AMOUNT OF RATE THAT YOU GET EACH TIME A CD MATURES IS VIRTUALLY APPLIED OVER YOUR TOTAL LADDERED CD AMOUNT AND NOT JUST ON ONE CD AMOUNT.

7
Comment #5 by dcurrey posted on
dcurrey
I went with 1%,  Had you asked me this exact same question 5 years ago answer would be been much different on the order of around 3%.

4
Comment #6 by Anonymous posted on
Anonymous
Anything less than 3% is not worth saving.

6
Comment #7 by David DuVal (anonymous) posted on
David DuVal
If we are in a deflationary environment (ex. house prices), then a savings acccount at just 1% still works as arbitrage. Your money is growing slightly as the cost of housing is decreasing. 

3
Comment #8 by saverlessgal posted on
saverlessgal
I think the answer for each person would be according to how much savings they have accumulated over the years.  1% of $50,000.00 would be about $500 but for the lucky ones who have $500,000.00 that is $5,000.00 they would be giving up and so on.  Frankly I don't think anyone who has disciplined themselves to be "savers" would be ready to give up even the $500 at this point.  It is a sad day in our economy that we even have to be discussing the possibility of accepting a paltry 1% on years of self discipline in saving!

16
Comment #9 by Anonymous posted on
Anonymous
Unfortunately interest rate will remain at the current level easily for the next five years if not many years more. So good luck savers...

We have near-zero interest rate for such long time, is like a person having serious substances abuse problem - it's very difficult or impossible to be "detoxed" and not to mention near-zero interest rate relationship to Optional ARM and the housing market.

Predict there will be "Operation Twist" by the FED in this month's FOMC meeting. QE3 will be saved for the year-end since it's only logical to last past the next election (November 2012).

Even the experts agree there are very limited success with QE2 other than popping up the equity markets. The same can be predicted for QE3, QE4, QE5, etc. We're in a new global economy and there are only so much one can do just by "printing money" or whatever FED chooses to call it.

4
Comment #10 by Pablo Savin (anonymous) posted on
Pablo Savin
Go long, go ten years . you can find 3 % not the greatest, but what are you going to do. Savings accounts are a joke

3
Comment #14 by 51 PERCENT (anonymous) posted on
51 PERCENT
will settle for 1 percent how sad

2
Comment #15 by divest (anonymous) posted on
divest
along with every body else also lost monies  but at least i can spell  more  than CDS come on people nothing ventured nothing gained

1
Comment #16 by Anonymous posted on
Anonymous
For me 1% is just about the level where it would not be worth it to open another account elsewhere.  I have several accounts that are paying below 1%, so opening another one of that type would not result in any significant additional revenue.  The spread between the internet banks and the traditional banks is getting slimmer.  I have most of my money in banks that are not exclusively online (with branch offices) and they pay more than the non-branch internet (or mail, phone only) banks.

1
Comment #18 by Anonymous posted on
Anonymous
If the difference is 0.5%-1%, I would consider. I will move my money for 1% difference for sure.

For people who are in retirement, if you are getting money from the bank for 1%, I would suggest you to use Annuity. At least it's better than 1%.

1
Comment #20 by Bancxman (anonymous) posted on
Bancxman
I keep my money stashed in a well knownn online checking account that currently gives me 1.15%. That's my bottom line.  After factoring in taxes, it no longer makes much sense to invest in certificates of deposit because the real return simply is not that much greater.  Also, I will not assume the risk of putting myself into a higher tax bracket or limiting access to my money just to earn a few additional bucks.

It's a shame that individual savers cannot directly purchase stable value funds.  I have about one-half of my employer 401(k) money invested in them and the returns are substantially higher than those banks currently offer.  Moreover, these funds are relatively safe because the assets in them are insured.

4
Comment #21 by Anonymous posted on
Anonymous
It's gotten to the point where I can make more money from the $100/200/300 bonuses for opening bank and credit card accounts than from the interest earned.

6
Comment #22 by Shorebreak posted on
Shorebreak
For liquid, immediate availibity of cash it really doesn't matter anymore since rates are so low. No one cares.

3
Comment #23 by Anonymous posted on
Anonymous
SINCE RATES ARE SO LOW NOW, WOULD IT MIGHT NOT BE THE TIME TO REPLACE SOME OF YOUR NEARLY WORN OUT ITEMS, LIKE A 15 YEAR OLD CAR, LAWNMOWER, DISHWASHER, FURNITURE, ETC.,  INSTEAD OF LOCKING UP YOUR MONEY IN A LONG TERM 3% C.D.?  

4
Comment #24 by Anonymous posted on
Anonymous
I have been waiting for years now for rates to increase. I had almost $800K liquid in four different online banks. I am retired and need a 7% rate of return to live comfortably and was not getting anywhere near that amount of return. The best I have now is 1.15% at ING.

 

I decided enough was enough and I pulled a large portion of my cash out and started buying real estate. I have bought six condo's over the past year and have all but one rented out now (just closed on #6 last week). With all expenses (HOA fees, paint/carpet, repairs, ect...) included, my rate of return is now about 11.5%.  Also, I figure when the housing market turns, I can sell later and make some capital gains and get out of the lanlord business then. If I decide the issues become too much, I can pay a property management company to manage my units and still be over 10% return. I bought the condo's at a huge discount below peak value. I estimate I bought at 65% of peak value (average) so when the housing market returns to 2006 levels, I can sell and enjoy a 45% capital gain. Or I can just keep the real estate and stay even with inflation. It was the best decision I have ever made.

9
Comment #25 by Anonymous posted on
Anonymous
#24

Congrats on taking some very positive action on the rate of return situation. Although rentals can be a pain at times, the dollars involved, in your case, should make it all worthwhile. In my area, I have been unable to locate any rental units that would give me any more than a 4-5% return.   

1
Comment #26 by Donald (anonymous) posted on
Donald
Savings rates are already ridiculous.  I use any extra cash to pay down my mortgage and buy I-bonds.   The stock market is too crazy right now to invest anything.

2
Comment #27 by Joe (anonymous) posted on
Joe
The only power we have as consumers is to "vote" with our feet. Use the Internet Banks with at least 1% and send a note to the banks you are moving your money from.

Whether or not you will make much more money is not, in my opinion, the point.

If the majority of Bank savers would do this, it sure get the Bank's attention.

 

1
Comment #28 by Anonymous posted on
Anonymous
To saverlessgal - #8,

You are wrong on the comparisons of the amounts.

If the person with $500K receives  $5K in interest only and the real inflation is much higher, lets say 4%, the purchasing power lost is $20K per year on that amount, which means the person with $500K is losing 10 times faster the value of his investment and has to add 10 times more money to that reference point, just to stay in line with the inflation, than the person with $50K.

 

3
Comment #29 by saverlessgal posted on
saverlessgal
Joe #27:  Your post reminded me of what happened when I tried to do this with my local bank.  I was told they didn't need my money because they could get ALL they wanted for practically ZERO interest from the Federal Reserve!  I called the Federal REserve and was told it wasn't as easy as that bank officer made it sound.  They had to follow strict requirements and could only get so much.  I let the bank know that I was taking my "unwanted" funds to other banks which I did.  This was about two years ago before things even really got this bad so can you imagine how much more the banks feel they don't need our money?  No one is forcing them to make loans so they don't have to give us decent interest rates to get our money any more.  Bernanke and his troops have taken the savers to the slaughter house, imo!

Anony #28:  I'm not that stupid and I took it into consideration that our readers knew I was not considering inflation.  I am going for the rate "I" need to survive with and beat inflation by making sure the funds are spent wisely and never pay retail for ANYTHING!  They can raise the prices all they want.  Have you ever heard of "sales"?  Whatever I need or want always goes on sale and then I can afford to buy it with the interest I count on from my CDs.    If I sat around and considered the "inflation" factor in what I can get today on CDs, I would be writing you from the local nuthouse! 

7
Comment #30 by Anonymous posted on
Anonymous
To saverlessgal - #29,

So, you know that you are on the losing end of the savings, yet, your head is buried in the sand and pretending that this is going away and you will suffer no consequences because of the low interest dates.
By the time you realize what has happen, your $500K will be worth $400K and you will buy stuff on discount for the rest of your life. In that case, enjoy your life style.

3
Comment #33 by saverlessgal posted on
saverlessgal
#30:  I can't stand "sand" and I consider myself a realist.  I know exactly what is happening at all times and that is why I spend so much time researching these type blogs and forums.  I don't have time to put my head on a pillow these days, much less in the sand.  You have your way of dealing with our financial problems, and I have my way.  It's worked great so far for many years during the good and the "bad" times.  And what is wrong with buying on "discount" for the rest of my life?  It's my way of not letting inflation destroy my lifestyle.  By the time, my CDs mature in 2012, I will have gas in the car and be ready to head to the bank which I hope to find which will give me "my" interest rate "I" need to survive.  Hopefully, Ken, and the others on here may even be suggesting banks I can go to.  We'll see.  It's my life and I do what I have to to survive the financial upheavals of our nation.  Have a great day!

3
Comment #36 by Rosedala (anonymous) posted on
Rosedala
All I can say is, because I don’t want to deal with the time-consuming complications of real estate, stocks, or even buying gold at this super high price, I choose annuities, andI have now (all 3 maturing in 2017):    Ing 5-year annuity at 5.05% Jackson 8-year annuity at 5.46% Jackson 8-year annuity at 5.66%   One annuity I still have, I bought like “100 years ago” without knowing a thing about annuities period... recommended by the bank manager at my then CD maturity.  But I can withdraw it without penalty in 2014 and it hasn’t gone below 4% (after my original 9%) lol!   The important thing is to avoid greed (I being the worst offender) of buying them with double/triple the going high annuity interests, AND to make sure the insurance ratings are the highest possible. I prefer (especially after my big stupid blunder with the “100 year” annuity), to buy ONLY CD-type annuities.  You can withdraw all interests without penalty.   I was fortunate to have caught Penfed CD at 6% but it’s maturing end of this October, so I’ll have to start searching now for annuities.   Just an idea for all of you, and...Good luck to all of us!    :-)

1
Comment #38 by Anonymous posted on
Anonymous
Number 24, where do you live?  Phoenix?  Las Vegas?  Florida?  I can't find any condos or houses selling for 65% of value in my area, and the best return on rental housing I can see is from 5-6% after the real estate taxes are paid.  I am not adverse to moving, in order to get a decent return on my money, though.  I like to earn 11% with the cash I've got left.

So far, I've done well on my savings in this low-rate environment, because when rates started collapsing a few years ago, I transferred half of my net assets into gold. That half has more than doubled in value, whereas the rest of my money is earning nearly nothing.  I expect it will double or triple again, over the next year or two, given that Switzerland (home of the last non-counterfeited paper currency, the Swiss franc) has joined the currency debasement game.  Now, I am sorry I didn't get completely out of paper and into gold.

David Duvall, one of the commentators above, said that a 1% yield is great in a "deflationary" environment.  But, what kind of weed is he smoking?  Everytime I go to the store or fill up my cars I see huge inflation.  My favorite cookies at Walmart are now selling for 35% more than they were in 2009, for example, just two years ago.  The government is lying about inflation.  The only thing going down in price are houses, but not so much in my area of the country.  The prices listed are still huge in my area, way over what I think they are worth.  The big housing price drops seem restricted to places like Phoenix, Nevada, and Florida.

 

 

1
Comment #39 by Anonymous posted on
Anonymous
This is #38 again.  One more thing #24... about rental housing... 

Even in AZ, NV and FL, prices are predicted to drop further from where they are now.  In areas, like Salem, OR, not initially hit as hard or as quickly as the boom states, prices just dropped by 22.5% last year!  Before that, house prices there had been much more stable than in many other places. 

Doesn't the possibility of losing principal worry you?  In my area, people are still actively demanding ridiculously high prices marginally lower than they demanded in the housing bubble era.  I am not sure if the houses are really selling near these prices, but the asking prices in newspapers haven't come down much at all.  When people finally give up their dream of getting rich from their house, and prices do drop in areas like mine, as was the case with Salem, OR, aren't we going to see double-digit drops?

To be honest, I am also slightly worried about my gold, given that the price has gone so high, and all the newspaper people are printing "bubble" stories.  But, the fact that they are printing so many such stories argues that the price is going to continue to rise and I've got a huge profit cushion already built up there.  Also, it seems inevitable that the world will go back to the gold standard in the next 5 years, now that everyone knows that the Federal Reserve is fine with counterfeiting the dollar. 

So many countries are announcing they are buying all the gold produced inside their borders (China, Romania, Kazakchstan, Bolivia, etc.).  The Wiki-leaks US State Dept. documents indicate that China believes that the world is going back to the gold standard, and that the Chinese are also convinced that the U.S. government has actively tried to suppress gold prices to support the dollar in the past.  So, with central bank buyers reducing the amount of gold available, and the probability of a return to the gold standard, and the likelihood that the US government has engaged in gold price suppression for a long time, I am not that worried about a bubble. 

The problem I have with buying real estate (even though I like the general idea) is that there doesn't seem to be anything that would indicate that the real estate market has yet fully exited the bubble, especially in areas like mine.  When will prices stop falling?  Who knows?  You might be making incredible returns, but if your asset's basic value is declining, you need to offset the return by the amount of the decline.  Isn't that right?   Please share your thoughts.

Thanks!

 

2
Comment #40 by Anonymous posted on
Anonymous
Comments number 34 and 37 are gone.  They must have involved political opinions which were deemed as attacks.

1
Comment #41 by GONE BUT NOT 4GOTTEN (anonymous) posted on
GONE BUT NOT 4GOTTEN
do not know bout 34  but 37 was a aspca question to rosie bout her port belly pig andy  guess this politically incorrect ?? 

1
Comment #42 by Anonymous posted on
Anonymous
I am removing my savings from my local bank and keeping the $100 bills in my safe. They are not paying any interest anyway and I think when the depression comes very soon the banks won't be able to give us our money back and the FDIC will be a joke.  They won't be able to bail out all of the failed banks. My money is being inflated away but I will have some to buy food and fuel if any is available. Cash will be king during the depression like it was in the 1930's.

 

1
Comment #43 by Paoli2 posted on
Paoli2
I hope you have your cash well hidden.  I would hate to think what will happen if riots start and it becomes known "you" have cash.  Not a pretty picture.  What you are describing would be a complete destruction of our government.  Sure hope you are wrong!

2
Comment #44 by Anonymous posted on
Anonymous
THE FED IS OUT OF CONTROL<LOWER RATES THAN LESS THEN ONE % WILL ONYL MAKE THINGS WORSE.THE FED MUST STOP AND BE PRATICAL STOP TRYING TO PLEASE WALL ST AND THINK ABT PEOPLE. THE FED HAS DONE MORE THAN ENUFF  AND ANY FURTHER ACTION IS STUPID>THE FED SHOULD BUILD CONFIDANCE AND SAY IT IS NOW UP TO CONGRESS TO ATTACK THE JOBS PROBLEM STOP ALL WARS AND BUILD INFRASTRUCTURE

1