$10,000 in a typical U.S. savings account would earn only $9 in interest after ten years. That means someone working for minimum wage would earn more in an hour and fifteen minutes running a fryolator.
Savings Accounts: A Bad Place to Keep Money Long Term
Most savings accounts generally aren’t a good place to keep money long term. One reason is that money in them just doesn’t grow very fast. Interest rates of .01% in savings accounts are fairly common. Wells Fargo is one of the country’s biggest banks, and it offers a base rate of .01% interest for savings accounts. That’s not 1%, it’s .01%. As in, one one-thousandth.
Don’t spend it all in one place.
At .01%, a savings of $10,000 would grow only about a dollar a year. Even with compound interest working its magic, after ten years the investment would only grow by $9.0036. That’s hardly enough for a Starbucks coffee stop.
Worse, money that doesn’t grow is robbed of value by inflation. Inflation in the U.S. has historically hovered between 1% and 3%. That means $10,000 that doesn’t grow will only be worth anywhere from $7,602 to $9,135 ten years from now.
Some exceptions are Capital One’s savings account with a .75% rate and Synchrony Bank with a rate of 1.05%. Still not a great investment, but better than most other savings accounts.
Related: The 6 Best High Yield Savings Accounts
Savings Accounts Used to Be a Good Investment
Those were the days. Savings account interest rates at their peak.
Savings accounts weren’t always a bad place to put money. In the late 70’s money in a savings account could earn anywhere from 5% all the way up to 10%. Interest on savings accounts climbed as high as 14% in 1981 before settling back around 5% again until 2002.
Starting in 2009, savings account interest rates sunk below 1%, and in 2011 they sunk below a tenth of a percent and they haven’t recovered.
Someone who stuck $10,000 in a savings account back in 1975 would have had about $66,000 by 2008. At that point, the money in their savings account would have all but stopped growing. The table at the bottom of the article shows the details.
Why Did Savings Accounts Stop Earning Interest?
Savings account interest rates are linked to home mortgage interest rates.
Banks have traditionally offered savings accounts for one reason: so they could get people to give them money that they could then lend to other people. Even as recently as 2008 home mortgage interest rates were 7% or 8%. Since banks could lend money at those rates, they could easily offer customers a 4% rate on savings. They paid the customer 4%, but they lent the customer’s money to someone else for 8%, turning a 4% profit themselves.
The Federal Reserve Bank controls interest rates. Since the housing bubble in the late 2000’s, the Fed has kept interest rates low in an effort to boost the economy. That means banks can borrow money from the Fed at very low rates – currently .75%. Since the banks can get money for loans at .75%, they can lend it to homebuyers for 4% or 5% and keep the rest as profit. There’s now no reason for the banks to try to get consumers to put money in a savings account by offering high interest earning rates.
Related: How to Start Saving for Retirement the Easy Way
Consequences of Low Interest Savings Accounts
Low savings account interest rates may give people less reason to save.
The typical American has saved $0. That’s bad news for people who want to retire and bad news for the country. One reason for this lack of savings may be that people can’t simply stick their hard earned dollars in a savings account and earn 5% anymore. There are other investment options, but all of them carry significant risk.
On the potential upside, the low interest rates also mean people can borrow money at lower rates, which means more people buy homes. The conventional wisdom says the typical American’s biggest investment is their home. One problem with this is it’s not exactly working. Home ownership now is at its lowest rate since 1995. One reason for this may be that investors are taking advantage of the low rates, buying mass quantities of homes and then renting them out to people who don’t qualify for loans.
Better Places to Put Money Than Savings Accounts
It can be tough to know where to put money other than savings accounts. 5 year CDs can earn up to 2.5%. Stocks and bonds tend to earn more, typically returning about 10% and about 5% respectively, but they carry the risk of losing money.
Most financial advisers recommend diversifying heavily by putting some money in CDs, some in stocks, some in bonds and some in foreign stocks and bonds. The thinking is that, by and large, when stocks go up, bonds come down and when U.S. investments sink, foreign investments may rise. That doesn’t always work, however. In some cases, stocks and bonds can lose value at the same time. In an increasingly global economy where everything is linked, a global crash can send everything down at once.
Related: 5 Ways to Save Now Even if You Don’t Make Much Money
It takes a licking but keeps on earning. Investment funds tied to the DJIA and S&P 500 have seen big gains despite the big crashes. Image source: Google Finance
Still, investments in diversified portfolios generally gain value over time, in spite of periodic corrections and crashes. The Dow Jones Industrial Average has seen multiple crashes of 35% to 55% in recent years, but investments linked to it have grown over time regardless of the down times.
Some savers see stocks and bonds as two sides of the same coin and prefer to diversify further. Other investments that can be added to a portfolio to help it withstand a recession are investments in land and peer to peer lending.
Below is our table of savings account interest rates through time.
Interest Rates Over Time
| Year | Interest Rate | Value of $10,000 | Saving $1000/month |
|---|---|---|---|
| 1975 | 5.77 | $10,000.00 | $12,000.00 |
| 1976 | 4.97 | $10,577.00 | $24,692.40 |
| 1977 | 5.27 | $11,102.68 | $37,919.62 |
| 1978 | 7.19 | $11,687.80 | $51,917.99 |
| 1979 | 10.07 | $12,528.16 | $67,650.90 |
| 1980 | 11.39 | $13,789.75 | $86,463.35 |
| 1981 | 14.04 | $15,360.41 | $108,311.53 |
| 1982 | 10.60 | $17,517.02 | $135,518.47 |
| 1983 | 8.62 | $19,373.83 | $161,883.43 |
| 1984 | 9.54 | $21,043.86 | $187,837.79 |
| 1985 | 7.47 | $23,051.45 | $217,757.52 |
| 1986 | 5.97 | $24,773.40 | $246,024.01 |
| 1987 | 5.78 | $26,252.38 | $272,711.65 |
| 1988 | 6.67 | $27,769.77 | $300,474.39 |
| 1989 | 8.11 | $29,622.02 | $332,516.04 |
| 1990 | 7.50 | $32,024.37 | $371,483.10 |
| 1991 | 5.38 | $34,426.20 | $411,344.34 |
| 1992 | 3.43 | $36,278.33 | $445,474.67 |
| 1993 | 3.00 | $37,522.68 | $472,754.46 |
| 1994 | 4.25 | $38,648.37 | $498,937.10 |
| 1995 | 5.49 | $40,290.93 | $532,141.93 |
| 1996 | 5.01 | $42,502.91 | $573,356.53 |
| 1997 | 5.06 | $44,632.31 | $614,081.70 |
| 1998 | 4.78 | $46,890.71 | $657,154.24 |
| 1999 | 4.64 | $49,132.09 | $700,566.22 |
| 2000 | 5.82 | $51,411.82 | $745,072.50 |
| 2001 | 3.40 | $54,403.99 | $800,435.72 |
| 2002 | 1.61 | $56,253.73 | $839,650.54 |
| 2003 | 1.01 | $57,159.42 | $865,168.92 |
| 2004 | 1.37 | $57,736.74 | $885,907.13 |
| 2005 | 3.15 | $58,527.74 | $910,044.06 |
| 2006 | 4.73 | $60,371.37 | $950,710.45 |
| 2007 | 4.36 | $63,226.94 | $1,007,679.06 |
| 2008 | 1.37 | $65,983.64 | $1,063,613.87 |
| 2009 | 0.15 | $66,887.62 | $1,090,185.39 |
| 2010 | 0.14 | $66,987.96 | $1,103,820.67 |
| 2011 | 0.05 | $67,081.75 | $1,117,366.02 |
| 2012 | 0.09 | $67,115.30 | $1,129,924.71 |
| 2013 | 0.06 | $67,175.71 | $1,142,941.65 |
| 2014 | 0.03 | $67,216.02 | $1,155,627.42 |
A Sea Change in Saving
While savers can generally earn interest by investing their money in stocks and bonds today, the magic of the table above isn’t just that someone could become a millionaire in 40 years by saving $1,000 a month. It’s that they could do it largely risk free. That kind of high interest risk free investment just isn’t available to the average consumer anymore. Banks and large companies can still borrow risk-free money at low rates, which helps the economy, but fails to help individuals to the same extent. With this kind of setup, an informed observer would expect to see a booming economy where corporations and banks grow exponentially richer while average citizens are largely shut out of the wealth building game.
Related: 4 Best Bank Tools to Help Boost Your Savings
Sources:
What Was the Interest Rate Then? – MeasuringWorth.com
Why Are Savings Account Rates So Low? – The Simple Dollar
Median American Savings: $0 – Fox Business
U.S. Homeownership Rate Falls to Lowest Since 1995 – Bloomberg Business