The Impact Of Supply And Demand Upon Savings Rate

kcfield
  |     |   52 posts since 2012

We often discuss the impact of the Federal Reserve monetary policy decisions upon interest rate. However, there is another factor which seems to be exerting further downward pressure on interest rates; and that is the simple economic law of supply and demand. A recent survey of more than 1,000 people from Bankrate found that just over half of respondents place a higher priority on growing their emergency savings , an increase of 7 percentage points from last year. About one-third of respondents said paying down debt was their top priority, a decrease of 6 percentage points. While it is an excellent financial practice to establish emergency savings; the fact that more dollars are going to saving accounts--irrespective of interest rates--means that banks and credit unions have little incentive to raise their savings and CD rates. When the Fed finally does start raising interest rates down the road; we will want to keep an eye on this metric of savings account prioritization. Hopefully as the pandemic wanes; the savings metric noted above will revert to baseline levels so it will no longer exert downward pressure on savings rates.




blazer9
  |     |   134 posts since 2019
Even with the avg. interest rates of CDs that have been gathered by a few lucky members.
It takes huge deposits just to clear 1K a month for retirement. Best to just enjoy spending.
Sorry kids,,PaPa gonna Play.
kcfield
  |     |   52 posts since 2012
A good time to consider purchases as you mention; and also a good time for debt reduction as you effectively earn the interest rate of the debt you are paying down. In my case, I have been making large principal payments on my 2.875% fixed mortgage--which is like earning 2.875% interest--a pretty good rate of return in this environment.
CuriousDave
  |     |   45 posts since 2018
It's an especially good return if you have had no tax savings on the interest, which is the case for 90% of tax filers whose standard deductions exceed their itemized deductions. If that applies in your case, you are in effect earning 2,875% tax free, because mortgage or other interest avoided is not subject to tax.
kcfield
  |     |   52 posts since 2012
Curious Dave: That was indeed true, and an excellent point. Also, while I paid off my PMI in less than two years, those who still have PMI on their mortgage, and whose extra principal payments allow sufficient equity so that PMI can be removed, are earning far more effective return than just the interest rate on their mortgage.


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