How savers can still stay afloat despite low interest rates
Don’t chase rates; instead focus on long-term financial security. (iStock)
When researching ways to grow your hard-earned money, you’ve likely come across mention of a high yield savings account. What’s the difference between a high-yield savings and a basic savings account? The difference is all in the name: high yield. A high-yield savings account functions much the same as other savings accounts, but interest rates are often 15-20 times the national average.
The power of a high-yield savings account lies in the interest rate offered but with the onset of the coronavirus pandemic, the Federal Reserve has cut interest rates to historic lows. Low interest rates mean high-yield savings options have lost much of their appeal, but do not let this fact deter you from continuing to save.
Why are interest rates low?
The Federal Reserve Bank sets the base interest rate. This rate is how much it costs banks to borrow money from the government. The banks in turn, then lend money out to consumers at a slightly higher rate, and this difference is how they make money. The interest rate fluctuates based on the market outlook; the Federal Reserve raises the base interest rate when times are good and lowers it when the economy needs help (see the 2008 recession and currently amid the Coronavirus pandemic).
With coronavirus cases surging, 7.9% of Americans still unemployed, and a looming election, the economy needs all the help it can get, which is why the current Federal Reserve rate is at a staggeringly low .25%.
How can borrowers benefit from low interest rates?
It isn’t all doom and gloom - low interest rates are good news for borrowers because now it's relatively “cheap” to take on debt.
New borrowers aren’t the only ones who benefit from low rates. Consumers with existing student loans, mortgages, and personal loans can take advantage of low interest rates by refinancing their debt.
For example, say you took out a 10-year $10,000 student loan at 7% interest in 2018, but in 2020 you can refinance to a rate of 4.5%. Refinancing means you’d save $652 over the life of the loan and shave $33 off the monthly payment.
And the higher the balance refinanced, like a $200,000 mortgage for example, the greater the savings a person can see. Refinancing locks in the rock-bottom rates we’re seeing now, and you’ll get to keep that rate even after the Coronavirus pandemic is behind us.
Best of all, consumers can now quickly (and easily) compare interest rates on mortgage refinances and student loan refinancing via an online tool like Credible, which compares rates from multiple lenders at once.
How can savers still grow their money despite low rates?
Low interest rates, however, are less-than-great news for savers because interest currently only earns earns pennies on the dollar, barely keeping up with the rate of inflation.
COVID-19 has shown us all the importance of saving up an emergency fund; no one knows what could happen. And while another global pandemic may not be on the horizon again in our lifetime, unexpected job loss or a medical emergency can occur at any time.
Financial experts previously recommended keeping at least six to nine months of expenses in your emergency fund, but in the wake of COVID-19, a year’s worth of expenses is now best practice.
An entire year of expenses in cash is a large amount of money. But keep in mind that while the cash in a high-yield savings account may not be growing as quickly as it did in years past, it is still growing. Current low interest rates shouldn’t discourage you from saving in favor of spending. Every bit of savings helps build your emergency fund and interest earned is extra money you wouldn't otherwise have compared to a traditional account.
Even in the low interest rate environment, rates do vary between lenders, so it is still best practice to shop rates between lenders. Every little bit of higher interest helps, and consumers can shop rates quickly and easily with high yield savings options via Credible.
The bottom line
The pandemic is lasting longer than anyone expected, and the total economic effect of the “year at home” remains to be seen. With so much uncertainty, the Federal Reserve recently predicted rates to remain near zero until 2022. With this in mind, the best thing for savers to do is to keep up their good fiscal behavior, fully-fund their emergency savings, and contemplate other high-yield vehicles, such as investing, for any additional surplus.