Finding a savings account that’s safe but offers a decent return has become a frustrating task. Interest rates have been stuck at historic lows since the financial crisis hit, and they show little sign of going up soon. That’s good news for people borrowing money for a mortgage or auto loan but bad news for savers looking for higher interest rates for their cash.
A typical low-fee, no-hassle, low-minimum savings account currently offers about a 0.75-percent yield, says Ryan Fleming, a financial planner at Armstrong Fleming & Moore in DC: “It’s shameful, but that’s a really attractive short-term rate now.” That return means that a $10,000 account would generate about $75 a year—barely enough to pay for two lattes a month at Starbucks.
For larger amounts of savings, incremental increases in interest rates can have a bigger impact. Certified financial planner Barbara Warner of Warner Financial in Bethesda urges clients to consider online banks, which tend to pay slightly higher rates, for a savings account that’s sizable—say, $100,000. Ally Bank now offers a 0.84-percent return on its online savings account. The ING Direct Orange Savings Account currently offers a 0.8-percent interest rate with no fees and no minimum balance. (Capital One recently acquired ING Direct, which gives ING customers free access to the more than 830 Capital One ATMs in the area.)
CDs, or certificates of deposit, also offer higher rates of return, but customers usually are required to lock in money for a year or longer, or pay a fee to withdraw it, which means they’re stuck with a low interest rate if rates start to rise. “We don’t want to tie up somebody’s money for three years for 1.25 percent,” says Warner. “A year from now, that might not look good.”
Money-market funds are also relatively safe—and in the past have offered higher interest rates than savings accounts—but they tend to have more restrictions on withdrawals and access. Yields on money-market funds have dropped, and many of them pay less than savings accounts today. The Vanguard Prime Money Market Fund currently offers a yield of just 0.04 percent. And money-market funds aren’t FDIC-insured, as bank accounts are.
|Five Better Ways to Save|
|Banks are launching new types of accounts to encourage customers to save despite low interest rates. Here’s a roundup of some popular options.|
|Opt-Up CD||High Yield Free Checking||Orange Savings Account||Live Solid Savings||Way2Save|
|Minimum balance of $10,000 with an 18-month term. Currently pays 0.65 percent, but if rates rise during the term, you can lock in a higher rate.||Offers an interest rate five times higher than the national average for one year on balances of up to $100,000. To retain that rate, you must keep an average monthly combined balance of $5,000 across all accounts.||Pays 0.8-percent interest; no fees and no minimums.||Pays a 1-percent bonus, up to $25, on the one-year anniversary of an account. No fee with a $1,000 minimum or $25 or more in automated monthly transfers from a SunTrust checking account.||Offers automatic transfers of $1 a day, $1 with each debit-card purchase, or a monthly transfer of $25 into a savings account.|
|NOTE: Banks frequently change the interest rates offered on accounts; check online to get the current rate.|
Anyone willing to take on more risk, particularly for longer-term savings, can shift some money into more aggressive places, such as the stock market.
“There are alternatives to just savings accounts and money-market accounts,” says Scott Wilfong, president and CEO of the Greater Washington/Maryland division of SunTrust Bank. “There are good long-term bonds out there and strong dividend-paying stocks. The dividend yield can be double the savings rate, but you have to be willing to take on risk.” While all stocks are risky, dividend-paying stocks tend to be larger companies with excess cash.
For short-term savings, advisers generally recommend parking money in an easy-access savings account that imposes no fees as long as the account stays above a minimum balance—even if that means sacrificing some returns. Websites such as Google Advisor and Bankrate.com make it easy to compare rates across local and national banks.
When doing so, Warner recommends first checking safety. If a bank unexpectedly closes its doors, account holders can face delays in gaining access to their money even if the account is FDIC-insured, meaning deposits are guaranteed up to $250,000 per person per bank. Account holders can confirm that their bank is FDIC-insured by looking up the institution on the Bank Find tool of FDIC's website; credit unions offer similar protection through the National Credit Union Administration. The website Bauer Financial offers an easy search for banks’ “star ratings,” which indicate the soundness of a financial institution. Germantown-based OBA Bank has five stars, for example, while Colombo Bank in Rockville has zero.
Warner says banks change their interest rates constantly, so an appealing 1-percent teaser rate could drop to half that without notice. Some banks also have been instituting fees that can quickly add up, especially on smaller accounts.
“It’s getting harder and harder to find free accounts,” says Warner, and customers often need to read the fine print and examine all letters they receive from their bank to avoid being surprised with new fees.
The easiest way to avoid fees is to maintain the required
minimum balance, which varies by bank. Some waive fees for other reasons
as well: SunTrust waives them on its checking accounts if you
direct-deposit your income into the account; Wells Fargo forgoes the fee
on its saving accounts if you establish an automatic transfer into the
Low returns have led some banking experts to urge clients to consider potentially more important factors than interest rates when choosing a bank, such as convenience and lifestyle. Credit unions, for example, typically offer higher returns on savings accounts but might have fewer ATMs, so a frequent business traveler could find it harder to withdraw cash on the go.
“Typically, credit unions pay a bit better than banks, and many people like them for other services, too—they have cheaper car loans and good mortgage financing for members,” says Warner. To be eligible for membership, people typically need to work for a government or institution affiliated with a credit union or be related to someone who does.
Many banks offer free, sophisticated online tools to help customers manage their money, which can be worth more than earning an extra $25 a year. ING Direct recently launched My Saving Goals, which helps you figure out your budgets and timelines for meeting big savings goals and lets you set up automatic contributions into the account. When you reach a milestone, such as the halfway point, ING sends a congratulatory e-mail. Wells Fargo offers an online spending-report tool that tracks debit- and credit-card purchases and analyzes changes from month to month.
Local banks can provide a more personal touch for clients who enjoy in-person meetings and customized advice.
“Our tellers know our customers,” says Jennifer Montague, regional manager and senior vice president at Sandy Spring Bank, which is based in Olney. “With online banks, no one’s asking you questions to understand what you’re trying to do financially.”
Dan Waetjen, regional president at BB&T, urges customers as well as his own adult children to build relationships with bankers. “They help you understand what type of account is best,” he says, and alert customers when interest rates start to climb so they can adjust their accounts accordingly.
“If you’re someone who likes to walk in and talk to someone about your money,” says Fleming, “you should never consider an online bank—you will be so frustrated.” He recommends local institutions, such as OBA Bank, for that type of customer. “If you’re a decent-size customer—and for a local bank, that’s anyone with $25,000 to $100,000 or more in deposits—they love you. If you’re a good, memorable customer, those local banks will greet you by name when you walk in the door and know details about you, and they have a more stable staff than the giant banks, where people are constantly looking to move up.”
Most advisers and banking experts agree that regardless of the prevailing interest rates, the most important factor in building savings is to set money aside regularly. “It’s not a very exciting time in terms of rates, but it’s important to get into the habit of saving to build up balances over time,” says Erin Constantine, senior vice president with the deposit-products group at Wells Fargo. She recommends setting up an automatic transfer into a savings account on payday. Then when rates do go up, you’ll be ready to take advantage of them.
“These days aren’t going to last,” says Warner, adding that eventually savers may see rates approaching 2 or 3 percent again. On a $10,000 account, that would mean pocketing an extra $250 a year.
Kimberly Palmer (firstname.lastname@example.org) is author of the book “Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.”
This article appears in the September 2012 issue of The Washingtonian.