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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.
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.
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.
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%.
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.
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.
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.
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.
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.
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!
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.
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.
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!