A Look at the Puny Yields on Savings & Money Market Accounts These Days
By Jon Aldrich
Low interest rates have been around for quite a while, ever since the Financial Crisis of 2008 when rates were lowered to combat the Great Recession. I guess we have got accustomed to getting nil on “safe” money in bank savings accounts, money markets at our brokerage and Certificates of Deposit. We started to see rates come up in 2018/2019, when yields rose over 2% on these instruments for a time. However, like many other things COVID-19 changed in our lives interest rates plunged again as the Federal Reserve basically lowered short-term rates to zero to help save the economy during the throes of the pandemic. (Remember, the Federal Reserve controls the short term bond interest rates, while the markets determine the longer term yields.)
The chart above, presented in the latest Guide to the Markets, which JPMorgan puts out on a monthly basis with a lot of pages of neat charts puts the low interest rates we are experiencing in perspective really well. The chart goes back to 1994 and shows the rates that a savings or money market account was paying each year on a $100,000 savings account.
As you can see back in the 90’s and even up until about 2007, a $100,000 savings account could generate $4,000 or $5,000 a year in interest. But if you look over to the far, bottom right you see that in 2020, a $100,000 savings account might, on average, generate about $260 in interest for the year. (Don’t spend it all in one place)!
If you look above this on the far right it shows the current income (in blue) needed to beat inflation ($1,194), the green shows the amount needed to beat education inflation ($2,038) and the purple shows what is needed to beat medical care inflation ($5,079). You will notice the annual $260 generated from a savings account is a long way from beating any of these inflation metrics.
Of course, you can get a higher rate at one of the online FDIC insured savings accounts at somewhere such as Ally or others. Ally is paying 1.00% on their online savings accounts currently (which would get you $1,000 a year on a $100,000 of savings), but as low rates stay with us, the rates at these higher paying, online banks will also likely be coming down as well in the next few months.
It is nice to have an ample amount of cash around, especially in these uncertain times, but you have to be aware that over time inflation is going to erode the purchasing power of this cash, so you probably don’t want to overdo it too much with how much cash you have in these types of vehicles. If interest rates stayed at these levels it would take about 140 years for you to double your money!
This has really made investing difficult for those that do not want to take a lot of risk, as one has to be willing to take on more risk in the form of more stocks, riskier bonds or other areas of the market to try to generate inflation beating returns since savings and cash accounts will not do the job.
Things were so much easier years ago when you actually earned some interest income from your savings accounts, and it will likely be quite some time until we see that occur again. And, of course, getting to where we have higher interest rates will cause its own set of problems, but we will save that for another time to discuss.