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Should You Save Money with Interest Rates So Low?

By on September 26, 2011 in Money

Should You Save Money with Interest Rates So Low?Interest rates on savings products such as certificates of deposit, money market accounts, and savings accounts are at extremely low rates currently. If you can only earn a fraction of a percentage on your savings, should you continue to do so, or is your money best deployed elsewhere?

Why Interest Rates are Low

Several years ago interest rates on CDs and high yield online savings accounts were paying anywhere from 4% to 6% on your deposit. Those with large sums of money saved in these accounts enjoyed receiving large amounts of interest every month in their accounts.

But those high interest rates on savings products have been gone for many years. Those same high yield savings accounts are now only paying 1.0%. The reason rates are so low is due to the financial crisis and recession in the economy. The Federal Reserve has slashed the rates that influence short term (and long term) interest rates. As banks’ potential returns from lending money through mortgages and other products falls, their ability to pay out high interest on deposits falls. Rates are not anticipated to go up for many years as we all wait for the economy to recover.

The Value of Saving Money

With the return of saving money sitting, at best, 1%, should you even bother saving money? The government would love for you to go out and spend money – that is why rates are so low. 70% of the United States’ economy is based on consumer spending. By keeping rates low the hope is consumers will decide saving money isn’t worth it and will go out and spend freely. This will help the economy recover, which in turn will allow rates to slowly rise.

But saving money isn’t just about the interest you can earn. Before you decide to forego saving your extra money, consider these benefits of saving.

For emergencies

Having a stash of money available to you for emergencies is a key to a successful financial life. Emergencies happen, and without savings in the bank to handle them (or soften the blow) you are taking considerable risk. Individuals should have a minimum of 6 months of expenses saved up to life off of in case of unemployment or some other emergency. Families with higher living costs and more mouths to feed should consider increasing that amount to 12 months.

For future goals

Saving for the future goals is also important. If you need to buy a car in 5 years and don’t save for it, you will end up financing your purchase. You’ll throw good money after bad by paying interest on the purchase. Saving for the future is part of smart financial planning.

For interest

In light of the above points, earning interest should be seen as a bonus to saving money. Even if you were able to get 4% returns on your savings, that isn’t enough to make a significant impact on your life unless you have hundreds of thousands of dollars earning that rate. There are also ways to increase your savings return by using various cash back rewards programs or a rewards checking account.

Final Thoughts

Saving money is an important task to smooth out some of the bumps in financial road that come our way. It never hurts to have money sitting in the bank; it always hurts to need savings and not have it. Earning interest is just a nice perk.

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