How Your Cash Can Grow Amid Low Interest Rates
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Why are bank savings rates so low right now?
Here's your money briefing for Wednesday, October 14th. I'm J.R. Whalen for The Wall Street Journal. American savings rates jumped to record levels this year thanks to stimulus checks and enhanced unemployment benefits. But savers would be hard-pressed to see their money grow very much since banks are offering interest rates barely above zero.
Banks are actually flush with deposits right now, and they don't have to offer the huge rates to incentivize people to save that maybe we saw a year or so ago.
So where can you stash some cash and still see it grow? Our personal finance reporter Julia Carpenter has some answers, and she'll join us after the break.
Americans are stocking away money at record rates, but if you want your savings to grow, a standard bank savings account isn't the place to put it. Our personal finance reporter Julia Carpenter is here to discuss some other options.
How have savings rates changed from last year to today?
Hey, Julia, thanks for joining us.
Thank you so much for having me.
So, you know, it wasn't that long ago that many savings accounts, especially online savings accounts, were offering yields above 2%. What happened?
Savings accounts, especially high yield online savings accounts, typically adjust their rates as the Fed adjusts rates. So we see rates go higher, we see rates go lower, but now that we're in a long-term low-rate environment, we've seen these rates drop from sometimes higher than 2%, sometimes close to 3%, to now rates as low as 0.6%.
And it's not as if the competition among banks for people's savings, especially young people's money, has subsided, even though the rates have fallen.
That's absolutely not what's driving it. Banks are actually flush with deposits right now. The savings rate is an all time high. It hit that all time high in April. And they don't have to offer the huge rates to incentivize people to save that maybe we saw a year or so ago.
All right. So people can keep their cash in place.
What trade-offs exist between liquidity, yield and risk?
You know, it's not going to do much, but there are some other options available. But what does that mean for putting their money at risk?
That's the trade off. The more liquidity, the more yields that you want, the more risk you'll be taking on. So a lot of people prioritize the yield, the liquidity or their risk. You have to kind of pick one to determine how much you're comfortable with the other. So we see some financial advisors suggesting money market funds or fixed income ETFs. Those are great options for more yield, but they require taking on a little bit more risk and maybe compromising some liquidity.
Right. And so your cash might not be as readily available if you need it.
Totally. A great example of that are these high yield CDs we see.
Which alternatives to savings accounts can help cash grow?
You have to keep your money in them for sometimes one year, sometimes two years in order to get the yield you would have been seeing in your high yield savings account a year or two prior.
You know, you mentioned certificates of deposit or CDs. They're not the most exciting thing in the investment world, but, you know, maybe boring is better.
I talked with one advisor who said that she's been talking with people about adjusting their timeline for that. If you're comfortable compromising some liquidity and extending that timeline, there's options like fixed annuities or longer term CDs that can make you see some higher yield. But you have to be prepared that you won't be able to have access to that money as readily as you would if it's in a checking account or a savings account.
So let's say you don't have the stomach for putting your cash at risk. Where else can you look?
There's high yield checking accounts. We're seeing more people interested in those. And I spoke with one financial advisor who refers to these high yield checking accounts as getting creative with your money. There's also money market funds, these fixed income ETFs we mentioned earlier, but all of these options are going to require taking on slightly more risk than they would be in those high yield savings accounts. So it's kind of an adjustment of expectations for a lot of clients.
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Chapters
6 chapters
1
Why are bank savings rates so low right now?
0:05–1:00
2
How have savings rates changed from last year to today?
1:00–1:57
3
What trade-offs exist between liquidity, yield and risk?
1:57–2:40
4
Which alternatives to savings accounts can help cash grow?
2:40–4:09
5
How should I decide between CDs, money-market funds and ETFs?
4:09–5:01
6
How can I join the WSJ Six-Week Money Challenge and share my story?
5:01–5:29
Speakers
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