On Wednesday, December 16, the Federal Reserve opted to raise interest rates for the first time since 2006. The Fed pointed to healthy economic indicators – specifically, job growth – as the key motivator for action. Chairman Janet Yellen explained that rates would rise from 0 to 0.25 to 0.25 to 0.5 percent. Experts are suggesting this is just the beginning for rate hikes.
I’m not a Federal Reserve expert, fan boy, or aficionado. Nor have I spent years chastising its existence and advocating for a gold standard (I’m looking at you, Ron Paul). But I fundamentally understand the borrowing window. When the Fed keeps rates low, it makes borrowing cheaper. Vice versa, higher rates tend to make borrowing more expensive. Rates can also discourage or encourage greater savings rates.
The Federal Reserve seems to hold the reins on savers. As an advocate for frugality, I wondered how banks had changed their rates since last Wednesday’s decision. CNBC reported that Wells Fargo, JPMorgan Chase, and U.S. Bancorp “almost immediately” changed their “prime rate” (for borrowing). With a higher prime rate, new borrowers would see more expensive car loans, credit card interest, and home mortgages. It should bring new revenue to the banks, too.
A couple days ago I received a notification regarding my American Express credit card. Despite perfect payments, a near-800 credit score, and constant monitoring, my interest rate was being changed. The credit card would now inflict a 22.49% interest rate for carried balances. In other words, if I purchased something and wanted to pay it off over time, I’d be taxed an extra 22.49%. The move corresponded perfectly with the Fed rates, as my interest rate was previously 22.24% (still astounding).
When it comes to credit and borrowing, the changes were swift. Curiously, my savings rate remains unchanged. I still receive 0.10% and 1.00% for my Ally checking and savings accounts, respectively. These sit stagnant. While I understand that banks have an interest in protecting and securing greater profits through higher borrowing rates, I’m struggling to see the same “immediate” benefits for savers. Where is this additional quarter-point interest rate to encourage more savings?
It seems banks play the best of both worlds. When rates lower, they advertise and sell huge amounts of loans. Suddenly, the economy becomes bloated with cheap money and people spend instead of saving. And then higher rates create reason and rationale for banks to raise loan rates, with little care for updating savings rates.
Unfortunately, as banks keep rates low, the average saver suffers. Many low income and vulnerable populations rely on strong savings rates, but haven’t received them for years. Heck, I remember a time when my savings account paid 2-3% interest. Those days seem to be long gone — even with higher rates on the horizon. Today, savings rates can’t even keep up with modest inflation. Maddeningly, putting more in savings simply means you’re losing money each month!
As we consider this double standard in the banking world, let’s consider what we can do and where there’s money to be made:
1. Stay on the capital side
There’s power in capital. Whether you’re lending cash through peer-to-peer lending programs or investing in rental properties, those who put their money to work are handsomely rewarded. The game doesn’t shift much when interest rates change moderately. However, if you don’t have much savings, it’s important to build a little egg before engaging in these tactics.
2. Invest your spare cash
If you’re unable to buy real estate or invest larger amounts in lending, make a simple portfolio to invest your spare cash. There are various platforms that can automatically invest spare change, but nothing is easier or cheaper than opening a Vanguard account and choosing their exchange traded funds (ETFs). I’d recommend Vanguard Total Stock Market ETF (VTI) and Total Bond Market ETF (BND). Together, they afford rapid exposure to the markets with reduced risk due to diversity. Depending on your risk allowance or aversion, portfolios can be split 50/50, 60/40, 80/20, or even 90/10 between the VTI and BND. You’ll likely get a fantastic expected return no matter what you decide — in comparison to savings rates.
3. Advocate for higher savings rates
Unfortunately, the default — savings accounts — are too miniscule to help people who need it most. Despite the Fed’s decisions to raise interest rates, it seems that many interest bearing cash accounts aren’t receiving the benefits. As banks continue to hit record profits, there seems to be some wiggle room for better interest rates. Advocacy isn’t often talked about in personal finance, but speaking out and up is one of the most effective ways to change situations. Write your representatives in Congress and tell them you are waiting for banks to reward savings. Tell your bank that you’re looking for alternative locations for your money, and maybe even leave for a credit union (as they tend to pay better rates).