Online Savings Accounts Rates Suck– What Can I Do?

by Martin

I’ve promoted online savings accounts here many times and I will continue to do so. Last month I asked you guys what you thought was the best online banking account for 20-somethings? However, due to the recession, the rates are low across the board. Translation: online savings accounts rates suck. There’s no way to sugarcoat this. Some of us are stressing over this. Others just see it as a part of life that we can’t really control.

What can you do if you’re not happy with crappy interest rates at online banking accounts? You can complain. You can call your friends to moan about savings rates. When you’re done you can do something proactive. A few money moves that are better than a online savings account right now:

1. Pay down debt.

Perhaps the interest rate on your debt is higher than what your money can earn sitting in a savings account. This is a good reason to focus on paying down your debt. Plus paying down debt can be a major psychological boost to get you motivated to take your finances seriously. Being in debt can be miserable at times. There’s no better way to alleviate this misery than to start hacking away at your debt. Working towards becoming debt-free is a better option than low savings rates.

2. Invest in your retirement.

Saving for retirement in your 20s isn’t the juiciest topic. However, you don’t want to be struggling to get by when you’re 70 years old. Instead of putting your savings towards an account that pays you very little interest, you can get your money into a registered retirement account and have compound interest working on your side. Do you know where your retirement income will come from? If you don’t then this is the best time to get started.

3. Take some risks.

I’m not going to suggest that you become a drug dealer or take part in a pyramid scheme, but there are many chances that you can take with your money in your 20s. I personally have taken many chances with the stock market. I’m not going to start promoting certain stocks here on Studenomics. I just want you guys to consider thinking a little outside-the-box when it comes to your money in your 20s. With a steady income, strong work ethic and a solid skill set, you can always make your money back.

4. Invest in your side business.

I’m a monster fan of investing in yourself. You can take your savings and use them to invest in your side hustle. Last year I invested a few hundred dollars into the Earn1K program offered through IWTYTBR. I had always been skeptical of any online courses/eBooks/offers. On the other hand I really wanted to increase my side income. I figured that instead of having my money sit around in a savings account earning a few bucks, I could leverage a piece of this money to increase my income. This ended up turning into an exceptional decision. How can you invest money into your side hustle?

What have you done to combat low savings rates?

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{ 5 comments… read them below or add one }

1 Edward - Entry Level Dilemma

Putting money into a retirement account is a great idea when you are young. Through the power of compounding, every dollar you save now has more value than a dollar you save next year or a decade from now. A Roth IRA is great because you use after-tax dollars now and get tax-free money when you retire.
Stocks & stock-based funds (especially invested in a retirement account) are a pretty good idea right now, because the market is improving and pretty much everything is rising right now for some fantastic gains. One investment I made two years ago has almost doubled!

Another option besides what you’ve listed would be peer-to-peer lending like Lending Club or Prosper. By cutting out the middle-man of the bank, you get a better return on your money

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2 MD

Doubled your investment? Sounds awesome man.

To be honest I don’t know enough about peer-to-peer lending to write a piece on it. Have you tried this Edward?

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3 Edward - Entry Level Dilemma

LZOEX still needs to rise another dollar and a half before I hit that 100% gain mark, but it feels pretty great to see such a huge boost. Now if only I had bought more than 2 shares back then!

I have never lent through a p2p lender, but I did attempt to borrow from one a while back. I was denied due to my credit.

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4 Wiseguy

I just got back on track as far as retirement savings are concerned, so after I bolster my emergency fund/reserve cash a bit more, I’ll be looking for some short- to medium-term investment vehicles. Currently peer-to-peer lending is what I’m primarily looking into for that.

Length of investment term is another point worth making. See my forthcoming stand-alone post about that.

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5 Wiseguy

One thing to consider is length of investment term. Despite the very low returns from savings accounts, you might need to have your money there because it’s liquid. In contrast, many savings/investment vehicles do not allow you to access your money for a certain amount of time. If you anticipate the need to access this money in the near future, these choices are likely not for you despite their appealing rate of return.

If you need liquidity, you don’t have as many options. You typically get better returns when the recipient of the investment can be assured you won’t withdraw your funds suddenly. (Wouldn’t you be in bad shape too if your bank suddenly pulled your mortgage, saying, “Sorry, we kinda need that money back right now.” Ahh!) Here are some liquid options.
- Deposit account (checking, savings)
Savings account rates are almost zero right now (mine’s 0.09% at last check), and most checking accounts offer even lower rates or none at all. Shop around at local banks for high-interest checking, especially ones that aren’t big, national banks. I recently moved my savings (@ 0.09%) to a checking account at a small bank offering over 4%. They usually have requirements such as 10+ debit card purchases per month, and they might require a minimum balance. If you’re going to make 10+ purchases per month anyway, look into that. But don’t start buying things you don’t need just so you can reach that limit. :-) Then you’ll lose more than you gain.
- Money market account
Their returns might be slightly better than savings, but not by much. Also, it’s possible to lose money since it’s an investment.
- Stock market
You can sell and withdraw your money quickly, but you might lose money if you need to withdraw suddenly while the price is down. Plus, there’s never a guarantee that you will make money anyway. Also, if you’re constantly moving money in and out of the market, each transaction will cost you a trading fee of $5-10+ apiece, which will add up very quickly.

Non-liquid investments usually give you a better return in exchange for keeping your money inaccessible. Here are some non-liquid options:
- Retirement accounts (IRA, 401k, etc.)
You’re in it for the long haul, and compound interest is your best friend. If you can budget to save some money now for retirement, the returns will be huge. But you generally can’t touch your money until age 60 or higher without paying very costly penalties. The younger you are, the better returns get, so save as much as you can early on.
- Certificates of Deposit (CDs)
Returns on CDs aren’t all that great these days, but they’re higher than savings accounts. You can choose investment terms in yearly increments up to 10 years. Longer terms offer higher return rates. Cashing in a CD early will also incur costly penalties, so don’t do it. :-)
- Peer-to-peer lending
As long as you stay diversified over as many loans as possible, you mitigate the losses from defaults and can get a very good return. Loans are usually stuck at 3 years, though 5 year loans now exist. You will gradually get your money back (with interest) over the length of the loan, receiving a small portion from every monthly payment from the borrowers. That money is freely available to you right away because it’s back in your pocket. But if you need to withdraw your entire investment, you can’t. You may be able to sell your loan to another investor, but there’s no guarantee someone will want to buy it from you.

Middle of the road.
If you really need to be pretty liquid, you’ll be hard-pressed to find anything that will fill your needs and give you decent returns. If you can’t find a high-yield checking account like I mentioned above, short-term CDs are worth a look. CDs are sometimes offered in small terms as short as 3 or 6 months. Those have much lower returns, of course. But compared to a pitiful savings account, it’s a little something extra. Right now Discover Bank is offering 1.0% on 6-month CDs, which isn’t much, but it’s 11x what I’m getting in my savings account at 0.09%.

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