Federal Reserve Rate Cut Hurts Savers
So, you may be asking yourself – if the Federal Reserve cuts interest rates, how does this hurt savers? The answer is that a savings account’s annual yield is tied directly to interest rates. Typically, the bank will pay you part of the interest available for deposits and will keep the rest for their own benefit. Ultimately, the lower the initial interest rate, the less room the bank has to pay you for saving.
In a low rate environment, saving is all but pointless, as interest rates can be extraordinarily low, not even keeping up with inflation. In this situation, many people may start buying stocks and investing in other assets. There are entire conspiracy sites dedicated to these types of situation, but suffice to say, it does hurt the general population. While the intentions of the central bank may be positive, the outcome doesn’t always match. That is, as investments increase, it helps the relevant corporations, and by extension, they should be looking to hire more people, as one of the benefits. Unfortunately, companies don’t necessarily act the way that the Federal Reserve thinks they will.
Understand Why Interest Rates Might Be Negative
When a central bank cuts interest rates, it pays you less to save. If you store your money at the bank, a negative interest rate will cause you problems since your bank will start charging you for storing money with them. With these additional fees, your $1,000 in saving could become $990 in the first year and then $980, and so on. Negative interest rates turn the table on depositors, forcing them to pay a fee for keeping their money in banks.
As a result of this, people are then more likely to withdraw their money and keep it in cold, hard cash. As a result, there will be less money in the banks and since banks use deposits in order to make loans, they will be limited in the number of loans they can take.
In addition, negative interest rates punish people trying to save for retirement. If a retirement savings account stops paying interest and instead, reverses into destroying the value of the account, these retirees are left with a lot less money than they expected to receive for retirement, putting many into financial crisis.
Why Interest Rates May Stay Low for a Very Long Time
Even though the Federal Reserve has stated that they intend to raise interest rates in 2018, they are currently at such historically low rates. At an interest rate of roughly 2.00%, you will be lucky to get half of this in your savings account.
Some analysts believe that we will not see higher interest rates in the short term, unless there is some type of currency crisis. This is far beyond the scope of this article, but the reality is that it doesn’t look good if you think that you can put money into a savings account and build your fortunes, especially within such a low interest rate environment.
Emergency Funds Are Still Necessary
Despite negative interest rates, you are still going to need to save an emergency fund. You should save six months’ worth of expenses, and then start investing any additional capital that you might have. The emergency fund isn’t necessarily the same thing as saving, at least not in the traditional sense. This money is put away in the case of emergencies, such as a loss of employment or a sickness.
The value of saving has changed over the last few years, and in terms of financial growth, a savings account is not good enough by itself. Again, the emergency fund is one thing, but to believe that the savings account is going to be enough to provide you with financial freedom, is a real stretch at this point. It’s hard to imagine a scenario in which this current environment will change anytime soon, especially with the massive amounts of debt that governments have run up around the world. Remember, they have a vested interest in low interest rates as well.
In the End, You Work with What You’ve Got
With all this in mind, you will probably need to use other savings vehicles, beyond a typical savings account, to survive and grow financially in this environment. You need to find savings options with higher returns, which is possible with things such as Money Market accounts, real estate and of course, Certificates of Deposits (CDs). Take the time to understand the various options and don’t rush to simply put all your money into a bank savings account.