Why a terrible savings account rate is actually just fine

Falling interest rates may seem like a concern, but it helps to illustrate what savings accounts are really for.

I’ve also long talked about how you can use an online savings bank to get much higher interest rates than with your standard bank. I’ve had some good things to say about Ally Bank, and some less than good things to say about Capital One.

But interest rates rise and fall, and boy are they falling now.

It’s enough to make you wonder if you’re doing the wrong thing by even using a saving account. Maybe you can do something better.

Falling rates

It’s hard not to look at my savings account interest rates and weep a little bit.

I’ve been keeping track of Ally’s interest rates for a number of years now. Here is what it looks like.

Interest rates on savings accounts with Ally 2018-2020

Every few weeks it seems, I get a new email saying that they are lowering their rates yet again.

I can’t blame them. Banks make money by lending it out and high interest rates, and incentivizing people to give their money to the bank by giving out (lower) interest rates.

But with the federal interest rate at or near zero now, and for the reasonable future, rates on everything are low. That doesn’t give much opportunity for them to offer much of anything to you, the saver.

What savings is for

With such low savings rates, you may be tempted to take your money out of savings and find a place that earns a higher return.

But to do this is to misinterpret what the purpose of a savings account is.

A savings account is there to help you save money, of course. But savings is not an investment.

Savings is insurance.

Insurance, really? Just like car insurance and health insurance?

Yup. But I call it “reality insurance”.

Because, well, reality bites. And sometimes, it bites hard.

My car went in for a routine maintenance checkup, and it turned out that it a solid four figures worth of repairs, not something that I could possibly find in my monthly budget.

Luckily, I had a savings account which I put a little into each month for just such a purpose. I could have called it a “car repair insurance” account.

I have lots of these savings accounts for various purposes. Some of these are for a specific goal, but others are just plain for when the unexpected happens.

You need this too.

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Why not an investment

Investments earn you money. Insurance costs you money.

Why not earn money on your savings? It sounds great in theory, doesn’t it?

The problem is that your returns are roughly the inverse of your liquidity. In other words, the more you earn, the harder, slower, or more expensive it is to get your money out.

You could open up an investment account and put your savings in there. And sure, you might make a few percentage points more in interest (though you also might not). But taking that money out will cost you in terms of time and money.

It’s not worth it. Save the investments for the longer-term goals. Things like saving up for your kid’s college, or your retirement plans.

Don’t worry about low rates

So if you’re dismayed by the tanking interest rates on savings accounts, and you’re wishing you could do better, by all means, shop around if you want. But you’re not likely to find an amazing deal, and so it’s probably not worth it to move your money around.

Your savings is doing exactly what it should be doing: waiting for you to need it. And it will be there. Even at 0.00% interest.

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