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The Saver’s Dilemma

At shizennougyou, I’ve been writing about putting money into high-yield savings accounts for as long as this website has been around. Just as people started getting the message, banks pulled the rug out from under their customers. The Federal Reserve made cash easy and cheap from banks to access, and since the low federal rates were announced, there has been no incentive for banks to pay those high yields.

High yield savings and money market accounts, alternatives to the typical savings accounts offered by primarily brick-and-mortar banks, helped savers keep their money safe while beating the average rate of inflation. You could put your money in the bank and not have to worry about your cash losing value over time or losing your deposit when a bank closes, thanks to FDIC protection.

More people than ever may be saving money. The recession coincided with a “new era of thrift,” with reports in the media about the savings rate — the amount of income saved by Americans, not the interest rate — at long-time highs. This good news came at a time when the reward for doing so wasn’t much of a benefit. To spur the economy, the Federal Reserve cut the interest rate on the money it loaned to banks, and the banks in turn didn’t seek money from depositors like you and me. The low interest rates reflect the fact that banks don’t need to attract depositors when the Federal Reserve is a better source of low-cost cash.

While high-yield savings once helped savers maintain their purchasing power and liquidity at the same time, that’s not the case today. Even with a lower-than-average official rate of inflation, the real costs of living that people experience continues to rise. The money in high-yield savings accounts isn’t going to keep pace with increasing costs.

Once the public feels more confident in other investments — and it could be years before this occurs — people will take money out of savings. When money is invested in businesses, the economy will be seen as improving enough for the government to raise the federal funds rate. Banks will want to attract more depositors and savings interest rates will increase. This may be a simplified view of saving economics, but the result is what is expected: fewer people need to be saving in order for interest rates to make saving worthwhile.

It’s easy to say that keeping a portion of your wealth liquid in a saving account is a good idea even though there’s a bigger chance of losing purchasing power, and it is true. It’s becoming a more difficult argument, though, as people are tired of supposed high yields that for the most part have a maximum of 1.5% APY.

Any alternative to high-yield savings accounts are compromises, usually in the form of risk or liquidity.

  • Certificates of deposit don’t offer rates much better than savings accounts today, and when they do, they require locking your money away.
  • A common choice is investing in municipal bonds, generally considered safer, but even Vanguard is warning investors to be wary when investing in bonds. “… Yields aren’t likely to go significantly lower, and at some point when the economy does strengthen, they’re likely to push higher. When that happens, you’ll actually have principal depreciation that will at least partially, and perhaps entirely, offset some of your yield.”
  • Peer-to-peer lending is touted online as an alternative to high-yield savings accounts but that is a bad comparison. There is a significant amount of risk when you lend money to an individual who may not be fully vetted, and you don’t have access to your money until it gets paid back.

Don’t forget the benefits of savings accounts, even if the interest rate isn’t high:

  • You have almost immediate access to all of your money at any time.
  • Your deposits are fully insured up to the FDIC limit. No one has ever lost any money in a savings account, even when their bank has failed.
  • Savings accounts simplify better financial habits like automatic transfers from checking or paycheck accounts to an account not used for spending.

Saving is a dilemma because when the practice is adopted, particularly in an economic downturn when business lending and investment slows, the interest rates are lower. As the economy improves and more money is invested in businesses, interest rates are higher but fewer people are interested in leaving money in a savings account. Those who want to use a savings account regardless of the economy are subject to the interest rates defined by the whim of the economy. When interest rates are higher, people will save less money.

Updated August 25, 2011 and originally published April 7, 2011.

About the author

Luke Landes is the founder of shizennougyou. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 27 comments… read them below or add one }

avatar 1 rewards

Most of my cash savings is in an Ally bank 5-year CD (currently offering 2.4% APY). Because of the “industry low” 2 month penalty for early withdrawal (vs the typical 6 month penalty), this 5-year CD is still a great place to park cash even if you expect interest rates to rise in the next 6-12 months

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avatar 2 Ceecee

It also seems as if the rates tumble quickly and rise slowly. When you go into the brick and mortar banks these days, they don’t advertise their rates at the door like they used to. However, it is better than digging a hole in the back yard. All we can do is keep saving and wait for the rates to rise.

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avatar 3 Anonymous

As long as you are financially secure and have an emergency fund it is a great time to borrow money though. Seems as if we borrow money during the good times (higher interest rates) and save money during the percieved lean times (low rates). Why not borrow when rates are low and pay it back when they are beginning to rise?

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avatar 4 Luke Landes

That’s a great point! Rates for loans are historically low right now. It’s a great time to use other people’s money. For a while, when rates were even lower, lenders were a bit unwilling to extend loans. The credit crunch was a bad time, but lenders have loosened up since then.

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avatar 5 Anonymous

Credit cards, no. If anything they are higher than ever! (I think you’ll know my reason why). Home and auto yes.

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avatar 6 Luke Landes

Exactly right. Credit card rates are pretty bad right now, but if you can snag a personal or business loan, you should be able to do well.

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avatar 7 Cejay

I think that I will always have a decent savings account. After an unexpected illness that almost took me out of work and a few other knock outs, I have decided that I will always save. While the interest does bear some thought I have to have quick access to my money. Ceecee, when my grandmother died we found money in her mattress and her chest of drawers and some of it was so old and moldy that it disintergrated. There was probably some in a hole in her yard. She went through the depression and learned from it.

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avatar 8 shellye

As consumers tend to focus on paying down their debt rather than take on another loan, the interest income for financial institutions is on the decline, making it more difficult to pay better interest rates on savings accounts. That is the unfortunate reality in today’s economic climate. I read somewhere that, to get the biggest bang for your buck right now, is to pay off debt and just hold onto your cash. Even if you’re earning only .05% APY on your savings, at least you’re not paying out 14.99% on a credit card balance. That’s not very exciting news, but I guess the author had a point.

Suze Orman recommended in one of her publications opening a Roth IRA and using it as a savings account, since you can make withdrawals tax- and penalty-free and can earn a higher return . I have some money stashed in one, but I have a hard time thinking of it as a savings account that I could withdraw from if there was an emergency. But it’s an interesting perspective…

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avatar 9 rewards

Does any income for a retail bank come from commercial loans? If so, then it would decrease the effect of households simply paying down debt.

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avatar 10 wylerassociate

the other problem is that wages are declining and cost of living is increasing which makes it difficult to save. I try to save as much money as I can but it’s much easier said than done for many people.

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avatar 11 Anonymous

With the looming government shutdown, as an active-duty military member, I’m happier than ever that I’ve kept my emergency savings in an easily accessible online bank. If I had tried something more exotic in hopes of better returns, I’d likely be up a tree when my paychecks stop coming this month.

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avatar 12 skylog

this is a very good point pat. while everyone is unhappy with current rates in most of the “traditional” savings options out there, the one thing these options have going for them is their liquidity. the accessibility of these funds is desirable in these uncertain times.

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avatar 13 Anonymous

I think the interest rate is not a significant issue! People are saving for various reasons. Some are fearful about their job, the economy, to provide financial security and liquidity. Sure it would be nice to earn a better return, but that is not as important as the other reasons. Housing values used to provide that financial security for people, now it does not!

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avatar 14 Anonymous

Saving cash {$$ Dollars} is a dilemma today — because of inevitable high inflation… not temporary low ‘interest rates’,

The Federal Reserve is wildly issuing new money in the TRILLIONs from thin air — to fund vast Congressional spending, corporate/bank bailouts, and 3 wars. This guarantees high inflation (15%++) soon. Dollar savings in any form will be wiped out in purchasing-power…well before ordinary bank interest rates skyrocket.

High inflation is very bad because it prevents average people from saving for the future… including retirement. It’s real bad and it’s really coming here soon. Simple talk of interest rates & savings account is for good times & a good economy — that ain’t now.

Current ‘real’ inflation rate is about 6%… and even at that rate you will lose half the real value of your $$ savings in 15 years. That inflation rate MUST double/triple/quadruple soon … due to Trillions of funny-money now injected into the U.S. economy by the government. Runaway inflation is also a real possibility– totally destroying the U.S. Dollar as currency (and all cash savings).

Real savings are only possible with non-Dollar-denominated assets (e.g., stocks, real-estate, commodities, rice&beans).

INFLATION is the looming tsunami… not low interest rates.

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avatar 15 TakeitEZ

I just try my best to stash a consistent amount into my online savings account. I hope to invest into some index funds and possibly municipal bonds in the near future.

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avatar 16 Anonymous

All my thirty-something friends are stock piling their cash right now because they’re afraid to invest it in the stock market, or anywhere else for that matter after gone through 2 recessions since we’ve been working in the last decade.

There cash is in their checking account, and some have online high yield accounts. A lot of them don’t even pay attention to interest rates in their checking and savings accounts, they pay attention to the news, and the news is bad.

As KevinR says, I too think inflation is a looming tsnuami, interest rates will creep up. So I’m less worried about my friends losing purchasing power on their savings money than I am about them completely avoiding investments all together given the experiences they’ve had so far in 2000 and 2008.

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avatar 17 Sarah

Having a decent amount of money set aside in a savings account is really comforting, but I really wish interest rates were higher. It’s frustrating to remember years ago when there were some that gave you as much as 5%.

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avatar 18 skylog

i hear you. i had just gotten into saving when all the online banks were outdoing each other on rates. it is the total inverse of what we are seeing today. it is almost as if there is some contest between the banks to see who can have the lowest rate.

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avatar 19 Anonymous

I think periods of low interest rates are very dangerous because people reach for yield. Retired people especially might be tempted to put their money in higher-yielding assets, such as junk bonds. Most investors just aren’t knowledgeable enough to even be aware of the risk/return trade-offs they are making by abandoning traditional savings vehicles like CDs.

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avatar 20 tigernicole86

I’m going to come out and say it: I’m young and I’m stupid. But, I know that I’d rather have my money safe and secure in a “decent” savings account like Ally rather than risk a lot of my money in the stock market. My grandparents have decided that they’ve done well and have put in quite a bit of money in stocks but again, they have a great instinct and reseach going into this so they do pretty well. But, as for me, I’ve always had a bit of a cashflow problem so best for me to stick my “extra” money into a savings account and get interest on it.

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avatar 21 Anonymous

Flexo – I had the same dilemma as well before and went into a quarter life crisis b/c I became uninspired with saving money and having money in the bank account for savings sake. I talk about it in a recent post “Why I Will Never Pay Off My Mortgage Until I Retire”.

Once I bought my place, I was rejuvenated again and felt like the money I was earning had more of a purpose. It’s weird how it works this way for me. Perhaps it might change some of thoughts for you once it’s deployed more aggressively.


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avatar 22 Luke Landes

This isn’t a “personal” dilemma. I’m not losing any sleep over what’s going on in my bank account. This is a “logical” dilemma, pertaining to the availability of interest rates and the economy. The point of the article is that, overall, people save more and are encouraged to do so when rates are low, and are encouraged to invest in stocks, businesses, etc., limiting savings account balances, when savings interest rates are high. That doesn’t change due to assets one person might own, and has little to do with whether *I* own a home. Although this is a “personal” finance blog, this particular point isn’t personal. Appreciate your thoughts, though. Maybe reading the article without trying to guess at my motivation and without assuming you’re more familiar with my circumstances than you are will change some of your thoughts.

If your argument is that savings interest rates don’t really matter when saving is for protection rather than investing, I mentioned in the article the benefits of savings not related to earning interest. It’s a wise conclusion, but is the case regardless of whether I, personally, own a house.

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avatar 23 Anonymous

@Flexo – Do you mean the opposite? When interest rates are low, I want to take on debt and invest because I’m not getting much in return for my money.

Am I different from most? I think I’m average like most people. Love to hear your thoughts.



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avatar 24 Luke Landes

Sam: Yeah, you’re different than most. It’s evidenced by the big increase in overall American saving rate (amount of income saved as a matter of percentage, not savings interest rate) during the recession — at the same time as a great decline in savings account interest rates. You’re in a good position — the recession probably didn’t hurt you that much. For many Americans, the recession hit hard, with loss of employment or just concern about expenses… and they weren’t thinking about investing with their lower amount of disposable income.

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avatar 25 Anonymous

I 100% agree with Sam. You want to take on more debt when rates are low. Same goes for the stock market and commodities. People are going into those in droves and long term might be better of if you invest in RE now.

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avatar 26 Luke Landes

I didn’t say Sam was wrong in his desire to put his money where the money is, but that’s not what I was talking about. You, Sam, and I might want to take on more debt when rates are low, and lots of other people do, too, but if you actually look at the data we’ve seen throughout the recession, the savings rate increased when the interest rates declined. Overall, Americans save when the times are tough, and when the times are tough, they’re not rewarded for saving. I’m not sure how this got morphed into a discussion about what any one person would do, but that’s not really the point.

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avatar 27 Anonymous

I’d really like to see more writing on taking on cheap debt in a time like these. It’s far more interesting than the savings topic that’s perpetually exhausted. I’ve been in paying debt down mode, my second mortgage and student loans but following those, sometime in the next year to two, I’m going to be free of those and determining how to be more balanced with my money allocations going forward.

Car loans are cheap, but I’m not in that market. Home loans are cheap and prices are cheap but I’m well under water on the one I bought in 2004. I’d like to upgrade the house I’m in or more to a better one sometime but that 2nd mortgage is baloons in 4 years and I’m not counting on equity to bail me out. We’re throwing cash at the 8.25% loan to eradicate it.

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