Why Savings Interest is so Low

Saving accounts have had some really low interest rates lately. What’s up with that? Savings accounts have traditionally been really good ways to save money while earning some modest interest on them. That tends not to be the case today with interest rates being so low and the return on your money not being as high. Why is interest on your savings account so low?

To understand that, you have to understand why your savings accounts earn interest to begin with. The premise of a savings account is that you give your bank money, and the bank will keep it for you. Furthermore, when you give the bank your money, the bank has the right to do whatever it wants with that money. Think of it as you are loaning the bank money that the bank will then lend out to people to buy cars, houses or cover expenses.

In return for that, the bank will pay you interest on that loan. It used to be that the rate would be somewhere between 3-5 percent, but today that amount is only one percent at the best, sometimes even lower than that. So, why are the interest rates so much lower than they used to be? One thing to keep in mind is that interest rates are tied to the state of the economy.

The economy is very sluggish these days. When the economy is bad, the government will lower interest rates as a way to encourage people to start borrowing money. When the economy is good, rates will go up to keep inflation under control and discourage people from borrowing too much money. The dollar also tends to be worth more when the economy is good and investors believe that there is more buying power.

With all this in mind, it means that when times are good, the interest rates on everything are going to go up, and this includes the interest rate on savings accounts. When things are bad, the interest rates for everything go down, and this includes your bank accounts. This is why savings accounts rates are lower today than they have been in the past.

The good news is that this means savings interest rates should go back up sometime in the future. Saving is still good to do without gaining interest because at least you still have your money, and you aren’t at risk of losing it because it is insured up to 250,000 dollars meaning that you have that money guaranteed to you. This alone is a good reason to save, and wait until the savings rates improve.