The majority of Americans are passing up opportunities to make money on savings in high-yield savings accounts.
CNBC’s Elizabeth Gravier reports less than 20% of a surveyed group representing American depositors kept their savings in accounts that could be earning them hundreds to thousands of dollars annually — essentially risk-free.
Instead, the majority of bank depositors are keeping their money in lower interest savings accounts tied to their traditional checking accounts. Some of the country’s biggest banks offer 0.01% interest rates on savings accounts, including Chase, Wells Fargo, and Bank of America.
But as professional financial advisors point out, moving to a higher interest rate savings account carries effectively zero risk. Deposits are insured by the FDIC insulated from and market volatility. Should federal interest rates change, the depositor will simply earn less on their savings – but not lose any money in the account.
In addition, depositors have the option to choose a certificate of deposit (CD) account, offering even higher interest rates.
Currently, high-yield savings account and CDs offer interest rates of 5% or more — a significant uptick from the paltry .01% or .02% offered by many conventional accounts.
The average American, with around $10,000 in the bank according to some estimates, could be making $500 a year off of that money, or between $35–$40 per month. That should cover a few monthly subscriptions.
“American families have a median cash balance of $8,000 across different bank accounts, including checking and savings accounts, according to data from the Federal Reserve,” Gravier writes. “If that money were to earn 0.46% APY in a traditional savings account, it would net just $37 in a year, whereas a high-yield savings account earning 5% APY would yield over $400 in interest payments in the same time period.”
So why aren’t more people utilizing higher interest savings accounts to get free money?
The most likely answer is that they simply don’t know about them.
That may be related to recent Federal Reserve activity. The nation’s central bank kept interest rates near zero for many years. Not everyone has noticed that the Fed started raising the interest rate slowly over the past couple of years, which has an effect on everything, including savings accounts.
Those looking for mortgages know that they’re paying higher interest rates now, but may not always translate that into opportunities to gain interest from other investments.
In general, professionals suggest that people should be putting their money into something that beats inflation. There is the option to invest in stocks or index funds, but that carries the risk of market downturns. CDs and high yield savings accounts do not.
There’s also 401k plans that are open to self-management for American workers. Economic research suggests that more Americans are taking hardship withdrawals from these emergency funds, degrading the ability of those funds to provide for retirement support later in life. Moreover, they incurring opportunity costs of having 401k savings grow.
The research illustrates that more often than not, the average American saver misses opportunities to recoup the maximum value from their money.
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