My disappointment with the current interest rates on savings accounts
Currently, I am quite disappointed with the 0.89% APR on my savings account with Fleet Bank. Even if that interest rate is compounded continually, the effective annual rate I earn on my money is just a little over 1% (1.008939723% to be exact). I am glad that by leaving my money in the bank, I earn interest on that money, giving me more money than I would if I left it under my pillow at night. What upsets me is that the purchasing power of my money is declining. Last year, the inflation rate was around 2.6%. With the money in the bank only earning 1%, the purchasing power of my money is declining and I am generating a negative real return on my money. According to the Fisher Equation, the real interest rate (or in my case, the real rate of return) is equal to the nominal interest rate (my 1% interest on my bank account) minus the inflation rate (around 2.6%). According to this calculation, the real rate of return on my money in the bank is –1.6%.
I know that there are alternative investment opportunities available to me. There are several debt and equity securities, and mutual funds that could offer me higher returns. However, my lack of funds and strong need for cash constrain me from investing my money outside of banks. As a college student who has less than $3,000 of money (cash) and needs every dollar of it for living expenses, I need to have easy access to hard cash. If my money is in mutual funds, stocks, or bonds, I do not have easy access to cash. To receive the cash, I would have to sell the shares for stocks and the mutual funds and/or sell the bonds. This will not put the cash in my pocket as quickly as going to an ATM machine. Also, in the case of mutual funds, the investor must invest at least $1,000 to buy into the fund. I can’t afford to have such a large fraction of my money tied up in the fund when I need the money (cash) to live on. Besides, with the way the market has been, I would most likely have a real return of my money much worse than the –1.6% at the bank, particularly with the equity securities. Thus, I am stuck in a position where the interest rate I can earn on my money in a savings account generates a negative real return.
Common knowledge ·
Mankiw, Gregory. Macroeconomics-Fourth Edition.Worth Publishers: New York, 2000. · Bodie, Zvi. Essentials of Investment-Fourth Edition. McGraw-Hill/Irwin: New York, 2001.