Americans keep more than $1 trillion in low-interest rate savings accounts, often for convenience and a desire for easy access to their cash, according to a recent study.
But by shifting that money into safe, higher-yielding accounts, consumers could reap $30 billion to $50 billion in additional interest yearly, says the Consumer Federation of America and Providian Financial Corp. that commissioned the study.
Low-yielding savings accounts that are earning on average 2.1 percent are widely held by consumers, no matter the age, income or education, the groups said. But Americans 65 and older may be losing out more than other age groups because they are more likely to hold accounts with $25,000 or more.
"One of the dangers is they just come up short needlessly in saving for the things they want in life," said Barbara Roper, director of investor protection for Consumer Federation. "The other danger is that, failing to see any kind of satisfying return on their money, they lack incentive to save as much as they could." Local financial planners say it's not unusual to see clients with big balances in low-interest accounts.
"Where I often see it is with business owners and professionals who are simply too busy in their day-to-day lives. They will just accumulate money in their checking or savings account," said Tim Chase, a financial planner with Wealth Management Services in Towson.
For instance, Chase said one client came in recently with an eight-figure net worth and more than $300,000 sitting in a checking account earning 2 percent. "He kind of admitted to it sheepishly," the planner said.
Consumers, Chase and other financial experts said, have several options:
Money market mutual funds, now paying 5.5 percent to 6.5 percent in taxable funds. They invest in Treasury bills, commercial paper and other short-term obligations, and though not FDIC insured, are widely considered safe. One can write checks, although many funds require a check to be a minimum amount.
Tax-exempt money market mutual funds. Though these funds pay a lower rate, now around 4 percent, higher-income consumers may come out ahead after federal, and sometimes state, tax breaks are figured in.
U.S. Savings Bonds. A new Series EE bond now pays 5.54 percent. Even better, a new inflation-proof Series I bond, made up of a fixed rate of 3.4 percent plus the rate of inflation, currently earns 6.49 percent. Rates are set every six months for new bonds. Neither is subject to state or local taxes, and federal tax is owed only after the bonds are redeemed.
Both come with restrictions: they must be held for at least six months, and if they are redeemed before five years, one forfeits three months' interest.
Certificates of deposit, which can be purchased for as little as $250, pay 3 percentage points more than a traditional savings account, suggested Consumer Federation.
"People tend to dismiss [CDs] as a savings account because you tie up your money for a period of time, although the time can be short," Roper said. As with savings bonds, you will forfeit some interest if you withdraw the money early.
Bank money market deposit accounts are FDIC insured and offer limited checking-writing privileges. Nationally, the average rate on these accounts is just over 2 percent, but if consumers shop around, they can find some offering an annual percentage yield of more than 6 percent, said Greg McBride, a financial analyst with bankrate.com, a financial data and research company in Florida.
Do you have a personal finance issue of general interest that you would like to see addressed in this column? Contact Eileen Ambrose at 410-332-6984 or by e-mail at firstname.lastname@example.org.