With interest rates still low, many of us are frustrated by meager earnings from savings accounts. Let’s look at why rates have fallen so low and how we can all do better.
Why do savings accounts pay low rates?
The interest rates on our savings accounts generally follow the Fed’s prime rate. When the prime rate goes down, interest rates on savings accounts typically go down too.
Why? When lending rates are low, banks can’t charge more interest (or make more money) on loans they’re providing. So there’s no incentive for them to pay out more on your savings account. Given the low rates, they’re not even much interested in competing for your savings deposits.
The current national average for a savings account interest rate is 0.06%. With inflation at 5%, our savings aren’t keeping up.
So what can we do? How can we earn more and stop losing money at the bank?
1. Open a high-yield money market account
One of the best alternatives is a money market account. They usually pay higher interest, they’re safe (FDIC-insured!), and they keep your cash accessible. Most allow you to write up 10 checks every month, and a minimum balance is required (or else you’ll pay penalties).
Money market accounts currently pay as much as 0.7%. It’s still not up to the inflation rate, but it’s more than a traditional savings account.
2. Try staggering CDs
If you don’t need access to your funds, try a series of staggered CDs (“certificates of deposit”). A CD doesn’t allow for withdrawals, and in exchange for that, you’ll earn a higher interest rate. When you stagger a few CDs, you can access your funds as each CD matures and have the flexibility to take advantage of higher rates down the road.
CDs can range from one month to ten years (with penalties for early withdrawals), and current interest rate for CDs are going as high as .75%
3. Check out high-yield bonds
High-yield bonds are similar to regular bonds: you’ll get interest payments at regular intervals and (hopefully) get your investment back when the bond ends (or “matures”). But high-yield bonds are usually riskier than regular bonds. They’re not “investment-grade,” and there’s a greater chance you’ll lose your investment. They’re also called “junk bonds,” and given the risk involved, it’s worth working with a trusted advisor.
Current rates on high-yield bonds are around 4%, less than half of the historical average rate (around 9%).
4. Give crypto a shot
It wasn’t until 2020’s pandemic stimulus spending that the crypto market truly took off. With extra cash in Americans’ pockets, Bitcoin soared 305% in 2020, increased another 60% in 2021, and hit a record high in November last year. It’s been on a steep slide since then, and with the Fed likely to increase interest rates, some forecasters expect more decline ahead.
But there are lots of different crypto currencies and lots of opportunities to explore.
5. Pay off your card debt
Americans pay about $120 billion in hidden card fees and charges each year. Whenever you can, pay the full balance on every card on time every month. You’ll avoid paying interest charges, have more credit available, and your credit score will probably stay healthy.
To clear your card debt faster, consider a popular pay-off method. With the Snowball method, you’ll pay off the smallest debts first. With the Avalanche method, you’ll focus on the cards with the highest interest charges each month.
Or use Bright, which finds the fastest, smartest way to pay off your cards. Bright’s MoneyScience™ AI makes payments for you, slashing interest costs, avoiding late fees and even adapting to your shifting finances.
6. Use Bright
Bright can get anyone debt-free faster, so you stop losing money on your banks’ fees and charges.
But Bright can also build your savings faster. Week by week, Bright moves funds from your checking account to your Bright savings account -- so you’re saving more regularly and hitting your goals faster.
Powered by MoneyScience™, your personal Bright Plan studies your finances and moves money when it makes sense for you, making smart credit card payments and building your savings, automatically.
If you don't have it yet, download the Bright app from the App Store or Google Play. Connect your checking account and your credit cards, set a few goals, and let Bright get to work!