Do you wonder what is the best rate of return that you can get on a savings account? Does it really matter? Toward the end of this article I will give you some rates I found, but even though it does matter, it doesn’t matter as much as you think, so don’t sweat it too much. Even though your savings account gets a poor rate of return, the idea is that the low rate is the cost of having insurance. I don’t mean insurance in the traditional sense, but self-insurance if something happens and you need to get your hands on your money for a health condition, lost employment, or car repairs, such as the transmission going out on your car. The cost of ‘insurance’ is the low rate of return. The benefit is having money readily available, insured by FDIC, and in something that won’t go down in value. Remember what Mark Twain said: “I am more concerned with the return of my money than the return on my money.”
That is the reason I don’t think it is too important to lose sleep over the low interest rate your savings account is earning. Also, the difference in rate of return isn’t going to add up that much anyway. For example, if your account is earning .50% and another one is offering .65%, the difference in accumulation in 1 year on $10,000 is only $15 dollars. However, as you save more money and you are going to have it in savings a long time, then you should do more homework to find a great rate.
Saving money is all the rage these days. In April of 2005 the US personal savings rate was .80%; today it stands at about 4%. More people are saving money as a result of the recession, now that they see the value of having a safety net. Hopefully the trend toward saving instead of spending almost all we make will continue and we won’t return to a spend-and-borrow culture that helped contribute to a recession. People are taking classes, learning from experience, and understanding the value of having an emergency fund of savings.
The challenge many people face is where to put their money. We are told to deposit it into a safe money market account, pass-book savings, or certificate of deposit, but the interest rates are horrible. We are supposed to save 3 to 6 months of expenses in case of a rainy day. If someone is self-employed, it may be good to have 12 to 18 months of savings in case of business slumps. If people are paying off debt, Dave Ramsey suggests they start with baby-step #1 and put $1,000 into savings, then start to snowball debt reduction with a gazelle run-hard mentality.
Basic bank and credit union savings and money market accounts are great, because they are easy to get to, they don’t go down in value like the stock or bond market, and they are insured against loss by the FDIC. Make note though–there are some money market accounts that are not insured.
I looked around the web and found some decent rates in the neighborhood of .65% to 1.05%; the best from my quick search was at CIT Bank and Sallie Mae. I found some institutions with rates as good as 1.50%, but they had requirements such as minimum balances and a checking account. At Bankrate.com the average money market account was paying from .50% to .70%, depending on minimum balance. Find a good institution, with a good rate, keep an eye on it, but don’t sweat it too much initially.