At Consumerism Commentary, I’ve been writing about putting money into high-yield savings accounts for as long as this website has been around. Just as people started getting the message, banks pulled the rug out from under their customers. The Federal Reserve made cash easy and cheap from banks to access, and since the low federal rates were announced, there has been no incentive for banks to pay those high yields.

High yield savings and money market accounts, alternatives to the typical savings accounts offered by primarily brick-and-mortar banks, helped savers keep their money safe while beating the average rate of inflation. You could put your money in the bank and not have to worry about your cash losing value over time or losing your deposit when a bank closes, thanks to FDIC protection.

More people than ever may be saving money. The recession coincided with a “new era of thrift,” with reports in the media about the savings rate — the amount of income saved by Americans, not the interest rate — at long-time highs. This good news came at a time when the reward for doing so wasn’t much of a benefit. To spur the economy, the Federal Reserve cut the interest rate on the money it loaned to banks, and the banks in turn didn’t seek money from depositors like you and me. The low interest rates reflect the fact that banks don’t need to attract depositors when the Federal Reserve is a better source of low-cost cash.

While high-yield savings once helped savers maintain their purchasing power and liquidity at the same time, that’s not the case today. Even with a lower-than-average official rate of inflation, the real costs of living that people experience continues to rise. The money in high-yield savings accounts isn’t going to keep pace with increasing costs.

Once the public feels more confident in other investments — and it could be years before this occurs — people will take money out of savings. When money is invested in businesses, the economy will be seen as improving enough for the government to raise the federal funds rate. Banks will want to attract more depositors and savings interest rates will increase. This may be a simplified view of saving economics, but the result is what is expected: fewer people need to be saving in order for interest rates to make saving worthwhile.

It’s easy to say that keeping a portion of your wealth liquid in a saving account is a good idea even though there’s a bigger chance of losing purchasing power, and it is true. It’s becoming a more difficult argument, though, as people are tired of supposed high yields that for the most part have a maximum of 1.5% APY.

Any alternative to high-yield savings accounts are compromises, usually in the form of risk or liquidity.

• Certificates of deposit don’t offer rates much better than savings accounts today, and when they do, they require locking your money away.
• A common choice is investing in municipal bonds, generally considered safer, but even Vanguard is warning investors to be wary when investing in bonds. “… Yields aren’t likely to go significantly lower, and at some point when the economy does strengthen, they’re likely to push higher. When that happens, you’ll actually have principal depreciation that will at least partially, and perhaps entirely, offset some of your yield.”
• Peer-to-peer lending is touted online as an alternative to high-yield savings accounts but that is a bad comparison. There is a significant amount of risk when you lend money to an individual who may not be fully vetted, and you don’t have access to your money until it gets paid back.

Don’t forget the benefits of savings accounts, even if the interest rate isn’t high:

• You have almost immediate access to all of your money at any time.
• Your deposits are fully insured up to the FDIC limit. No one has ever lost any money in a savings account, even when their bank has failed.
• Savings accounts simplify better financial habits like automatic transfers from checking or paycheck accounts to an account not used for spending.

Saving is a dilemma because when the practice is adopted, particularly in an economic downturn when business lending and investment slows, the interest rates are lower. As the economy improves and more money is invested in businesses, interest rates are higher but fewer people are interested in leaving money in a savings account. Those who want to use a savings account regardless of the economy are subject to the interest rates defined by the whim of the economy. When interest rates are higher, people will save less money.

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