Linda D. from Ocean City, MD asks: Hello Mitch, I’ve noticed the deposit rate at my bank has dropped to 0.1%, which feels like it’s basically paying nothing. I’m curious if you have any other ideas for earning a little bit of interest on cash right now, without locking it up. Thank you.
Mitch’s Response:
Thanks for writing, Linda. Yours is a concern shared by many around the country. Banks have pushed deposit rates lower in lockstep, to the point where the average rate on savings accounts currently stands at 0.8% – not exactly inspiring.
Banks are currently flooded with deposits – total deposits swelled to $15.9 trillion, which is up from $13.2 trillion at the beginning of 2020. And with a flat yield curve, it is not highly profitable to put those deposits to work by making loans. In a sense, banks are trying to discourage people from parking cash, and lowering their deposit rates is one way to do it.
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One potential option if you’re looking for a slightly more competitive rate is to take a look at online players, like Goldman Sachs’ Marcus, Capital One, or Ally Financial. You might find deposit rates in the 0.5% to 1.5% range, which again is a far cry from attractive. But it’s better than 0.1%.
A hard truth in this circumstance is that deposit rates are not likely to change meaningfully in the coming year or perhaps few years. Generally speaking, banks cut their deposit rates when the Federal Reserve cuts short-term interest rates, which happened quickly in March in response to the pandemic. The Fed slashed its benchmark rate by 1.5% in March, and banks followed shortly after with cuts to deposit rates.2
I cannot really give you advice on what to do with your cash, since I’m not fully aware of your financial situation. As a general rule, I like to tell clients to keep at least a year’s worth of cash in a savings account – enough that you would be able to replace your full income needs. No one can truly know what will happen in life and work, so it’s good to build-up a buffer of emergency reserves.
If the cash you’re asking about is part of your emergency reserves, I would say just leave it where it is (assuming it’s at a trusted financial institution). You could look to other banks for better deposit rates, but it may not be worth the trouble with rates so low across the board. Certificates of Deposit, money market funds, and U.S. Treasury bonds pay a little more, but your money may not be as accessible as you want it to be.
If this cash is in addition to your emergency reserves, you may consider taking a longer-term view with it, and investing it in accordance with your objectives and risk tolerance. Doing so is likely to yield you far more than 0.1% over time, in my view.
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