How To Make Your Money Work For You In A Low-Interest World

Laveta Brigham

Saving money during the Coronavirus Lockdowns? How to make the money of your money during the … [+] current low-interest rate environment. Getty Images You may be wondering where the best place is to stash your savings since interest rates have been historically low for over a decade (crazy, right?). […]

You may be wondering where the best place is to stash your savings since interest rates have been historically low for over a decade (crazy, right?). It seemed like those savings account rates could not go any lower, but they did during the COVID-19 Recession.

One of my clients forwarded an email to me from Ally Bank, which informed recipients the bank would be lowering the interest rate it was paying its savings account holders to only 0.5% starting the following day. Ally Bank appears to be following the lead of other online banks like Marcus, which had already dropped rates to 0.5%. My client was missing the days when you could earn 1.25% on savings. To be fair, Ally was paying more than 2% when I first opened a savings account with the bank.

One of the few unexpected bright spots of the coronavirus pandemic is that Americans (on average) have been able to save more money this year. It can be harder to spend money when you are on lockdown. But this increase in cash savings is leaving many people wondering where the best place to stash their cash is?

As a Los Angeles Financial Planner, I must point out that even when interest rates are much higher than they are now, your money will not likely keep up with inflation when toiling away in a savings account. I like my clients to keep “cash” in savings accounts only for emergency funds or funds that are going to be used in the next year or so. Longer-term goals like buying a home (eventually), paying for college (in the future), or retirement, should be funded by investing, rather than trying to earn some paltry amount of interest at the bank.

Are Online Banks Still the Way To Go?

The interest rates paid by so-called “High-Yield Savings Accounts” from online banks have dropped much faster than interest rates at traditional brick-and-mortar banks like Chase and Bank of America
. This has more to do with the meager rates paid by the banks rather than their generosity of great interest rates from online banks. Many traditional banks are now paying their savings account holders 0.01% to 0.03% per year, so a million dollars would earn a whopping $100-300 of interest per year. While I hope all of you have a million dollars lying around, I also hope that money is not languishing in a low-interest bank account.

For comparison, some online savings accounts were recently paying around 2%. Many have now dropped their rates to around 0.5%. Not great, but that one million dollars could earn $5,000 at that interest rate—quite a big difference. 

Can You Get Higher Interest Rates On Savings?

Savers needing higher interest rate options for their cash will need to consider other options. That often means taking on more risk, reducing liquidity, or perhaps, changing strategy and investing the money. You may find a little more yield in a money market fund. Some banks are advertising high rates if you lock your money up in a Certificate of Deposit or Exchange Traded Fund (ETF). If we are talking retirement funds, you may be able to find attractive guaranteed rates via living benefits on annuities as well. (There are many drawbacks to annuities that I don’t have time to fully explain here, so make sure to work with a fiduciary financial advisor who is not earning a commission by selling you an annuity).

Taxes on Interest Earned From the Bank

It is fairly common to ignore the taxes owed on the interest your savings account earned. For those who earn less than $10 in a year, the bank won’t even send you a 1099. Even those in the highest federal tax bracket (37%), who live in a high-tax state, like California (top tax rate 13.3%), aren’t likely to notice the taxes owed on the tiny amount of interest their savings accounts earned. But you should be aware that interest is taxed at regular income rates, whereas investing income is typically taxed at lower capital gains rates. (In case you needed another reason to get investing, where appropriate). The tax burden can be quite high for those with bigger savings balances, resulting in a large amount of interest income.

You work hard for your money; take a little time to make sure your money is working for you. Work with a trusted fiduciary Certified Financial PlannerTM to help you establish a financial road map to reach your important financial goals.

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