What an incredible waste. We in the United States are throwing away as much as $50 billion a year, a figure that, compounded, grows to $13.2 trillion after 40 years.
I’m not talking about some government bureaucracy squandering taxpayers’ dollars. I’m talking about us. American savers are forfeiting a veritable fortune by foolishly keeping our money in low-yielding savings accounts.
We do it because we’re hung up on a mistaken notion of safety and convenience, or simply because we don’t know about other accounts that pay much more and are just as safe, if not safer.
“American families keep savings exceeding $1 trillion in passbook savings accounts and money-market deposit accounts that on average pay just 2.1 percent interest,” said Stephen Brobeck, executive director of the Consumer Federation of America, citing figures from the Federal Reserve and Bankrate.com. “If savers shifted these funds to higher-rate savings accounts, certificates of deposit and U.S. savings bonds, they would earn $30 billion to $50 billion more in interest each year.”
A national survey commissioned by the federation and Providian Financial Corp., a consumer financial services company, suggests that a major reason Americans keep so much money in low-interest accounts is they just don’t know any better.
The survey of 1,008 Americans by Caravan Opinion Research Corp. International found that 57 percent of Americans with a savings account do not even know what interest rate their account pays. Nearly a third, or 30 percent, erroneously think there is little difference in the interest paid by savings accounts and certificates of deposit, yet CDs currently pay rates at least 3 percentage points higher.
And almost half, or 45 percent, do not consider U.S. savings bonds an attractive investment. But Series I bonds are now paying 6.49 percent interest, or more than 4 percentage points higher than the average savings account. Another reason savers leave their money languishing in low-paying accounts is that they find it convenient to have all their accounts in one place.
And a significant number, or 46 percent, say they don’t want to tie up their money, a reason for not wanting to buy CDs or savings bonds.
Yet it would be relatively easy to get a much higher yield with a few simple moves. I am not talking about “risky” investments, certainly not stocks or even corporate or municipal bonds. I’m not even talking about money-market mutual funds, though I believe your risk to principal with the biggest and more established funds is zero.
I am talking about — and the Consumer Federation is talking about — investments and accounts that have the same government protection and guarantee as a passbook savings account, or better. For many savers, this guarantee is all-important.
“What we have found with our focus groups is that moderate-income Americans are preoccupied, obsessed with safety,” Brobeck said.
Similarly, Federal Deposit Insurance Corp. insurance “is of extreme importance to older people, more than to any other age group,” said Katie Smith Sloan, director of life resources for AARP, formerly the American Association of Retired Persons.
Older people in particular can benefit by understanding other savings options. Although 62 percent of all U.S. households maintain savings accounts, cutting across all demographic groups, older Americans hold a disproportionate share of the money. For example, a person 65 or older heads 43 percent of all households with at least $25,000 in savings accounts.
“The good news is that people are saving,” Smith Sloan said. “The other side of the picture is that they are not realizing the full potential” of secure accounts.
For example, you may still keep your liquid money in a savings account, though by all means shop around for a decent yield. But once you have set aside enough for day-to-day needs and an emergency fund, why not buy CDs with staggered maturities?
That way you get a higher yield, yet never have to wait too long to get your hands on your principal. You may also want to put some of your money in higher-yielding U.S. savings bonds, which can be cashed in after only six months, and are even safer than bank CDs because they are backed directly by the full faith and credit of the U.S. government, not just a government agency.
You do forfeit three months’ worth of interest if you redeem a savings bond before five years. But even then you would be left with more money than if you kept the money in a 2 percent savings account.
You may also consider banking by telephone or by mail, taking advantage of higher yields available at out-of-town institutions that offer the same FDIC insurance as a local bank.
“What many people fail to realize is that it may be as convenient to bank by phone or mail,” Brobeck said, and I would add online if you are Web savvy.
With these simple moves, you could increase your yield significantly without compromising safety. And seeing how much more you make, you might even be encouraged to save more.
“If savers understood how much interest income they lost over time, they would likely not only shift savings into higher-yielding accounts but also put more of each paycheck into savings,” Brobeck said.
