The European Central Bank’s announcement that it will lower interest rates in the Eurozone and charge banks to park their funds in Frankfurt overnight brings renewed attention to the problem of bank depositors earning little interest on their savings accounts.
The ECB’s move is designed to spur banks to lend out more in the form of loans to European companies and individuals. By cutting its deposit rate to negative 0.1%, the central bank aims to boost economic growth in the region, which has struggled to overcome a sovereign-debt crisis that followed the global financial crisis and sparked a deep recession.
As the world emerges from the financial troubles of the last half-decade, central banks are signalling that low interest rates will continue. The U.S. Federal Reserve is ending its own quantitative-easing program, which pumped extra money into the economy, but rates are only expected to rise slowly for the next few years, unless inflation spikes sharply.
While more bank loans could have a positive effect on European businesses and encourage companies in the region to invest more, this is not good news for bank depositors. They are already suffering from ultra-low interest rates on savings accounts. Many people are fundamentally uncomfortable with the idea of having to pay to keep their money in the bank. With today’s near-zero interest rates on offer from most banks, the real return on cash is often negative, even in the U.S.
Fortunately, depositors have options. In the U.S., online banks have lower operating costs than traditional brick-and-mortar banks and are thus able to pay higher interest rates to their depositors.
With Max (MaxMyInterest.com), we have built an automated system that helps depositors benefit from the higher rates on offer from FDIC-insured online banks. Today, our members are earning a weighted average 0.87% on their cash, or 0.79% net of fees, which compares favorably to most bank accounts or money market funds that offer little to no yield.
The effects of compounding are important to an investor’s portfolio. Earning an extra 0.70% to 0.80% on deposits, year after year, can have a profound impact. Most Max members can expect to earn tens or hundreds of thousands of dollars in incremental interest over their investment horizons, simply by using Max to help continuously optimize their cash allocation across multiple online bank accounts.
Periodically reviewing one’s portfolio and ensuring that cash is working as hard as possible — while spread across enough banks to be adequately covered by FDIC insurance — is one way to enhance returns without taking on more risk. Many depositors, however, are too busy to focus on how they manage their cash. In a time of low interest rates, it’s crucial to keep on top of which online banks are offering the best rates and move deposits accordingly — or let Max handle it for you, automatically.
Gary Zimmerman is the Founder of MaxMyInterest.com.