Covid Impacts the US Savings Landscape

Back in April, the Federal Reserve Board has temporarily lifted the six transaction (withdrawal) limit on savings accounts so that people could more readily access their savings if they needed to during the pandemic. However, there were no rules issued to prevent banks from charging fees for transactions in excess of six per month. Bottom line, for those lucky enough to have savings stashed, it is better to access those savings than to hit a retirement account for an early withdrawal or drive up credit card balances. (CNN)

But as the pandemic wore on, savings was not a problem for those who did not lose income. The US savings rate hit a record 33% in April as Americans stopped spending and hoarded money, not surprising with so much uncertainty. For reference, the previous high savings rate was 17.3% in 1975, and March’s savings rate was 12.7%. Much of the savings was forced: there was nothing to spend it on! Consumer spending dropped 13.6% in April. (CNBC)

The follow on impact of this savings is that bank deposits grew $2 TRILLION between the beginning of the pandemic and late June, reaching $15.4 trillion and funds flowed into the economy between stimulus checks, unemployment benefits, and various Fed programs keeping liquidity flowing to businesses. Deposits grew by $865 Billion in April alone. But the increase was not experienced across the board. Over two-thirds of this increase flowed to the 25 largest financial institutions, according to the FDIC. (CNBC)

With more cash flowing into banks, it was predicted that interest rates on savings would drop, and drop they did. I watched the rate on my high-yield savings account drop gradually but steadily from the 2% offered when I opened it through a good part of last year, but it just last week dropped to 0.8%. All high-yield accounts dropped to record lows in the last week. While these rates are loosely (theoretically) tied to the benchmark interest rate targeted by the Federal Reserve, that rate was cut twice early in the pandemic, and the latest interest rate drop on these accounts was earlier in August. The influx of funds is like a supply shock (think Economics and supply and demand models), bringing down the price financial institutions are willing to pay you for your savings. Remember too that these institutions are charging less interest for the loans they are issuing as well.

Bottom line here is that even at 0.8%, these high-yield accounts far exceed the rates paid by banks, on average, 0.07%.

(CNBC) (Business Insider) (CNBC Select) 

Other “Savings” Accounts in the News

In case you need a refresher, Money Market Savings (Deposit) Accounts (not to be confused with money market mutual funds), are accounts offered by financial institutions that have some features of savings accounts (they pay interest, but often don’t pay much unless you deposit a large sum), and some features of checking accounts (you may be given checks and or a debit card for the account.) They are like a hybrid account with a few more rules (and fees) than either one. There are often minimum deposits to open/maintain an account. (Forbes)

You may hear more about something called a Universal Savings Account in coming months. This concept has been suggested as a way to help more people save money. The basic concept is that Americans would be able to save after-tax dollars, say up to $10,000 per year and invested, and earnings and withdrawals would be tax free, adding some incentive to save.   It would operate like a Roth IRA, but you wouldn’t have to wait until retirement to access your funds. The theory is that more Americans would be able to take advantage of this account, rather that dividing savings into separate tax-advantaged vehicles for retirement or education. (The Fiscal Times Opinion)

Want to gamify your savings? Open a PLSA (Prize Linked Saving Account). These accounts are getting some buzz. Even Walmart is reportedly getting into this. An FDIC insured bank holds the funds and teams up with a front-end gaming company. For every deposit of a certain amount, say $25, you are entered into a lottery to win a cash prize. The odds of winning may not be much better than playing the lottery, but at least the money you play with is still yours, and earns an interest rate a bit above a bank account, but still a fraction the high-yield savings we have been discussing in this update. Bottom line, if you like to play the lottery, open one of these accounts instead and hang onto that money. If you are looking for a good payoff, go directly to a high-yield, online savings account.  Life Hacker

Looking for a Crypto savings account? New options have cropped up this month, although the latest offered by Huobi is not open to people in the US. However, crypto payments company Wyre is partnering with others to offer crypto savings accounts. Wyre’s vice president of business explains:

• With Wyre’s new savings product, called Wyre Savings API, the company is aiming “to offer stable yield that has the least counterparty risk..”
• As of Aug. 12, interest rates were 2.4% on bitcoin (BTC), 2.4% on wrapped bitcoin (WBTC), 3.3% on ether (ETH), 5.8% on USDC and 5.7% on dai. Wyre has plans to roll out more tokens in the future.
• Funds can be pulled out any time, and interest is accrued instantly and paid out weekly on the product.

(Coindesk) (CoinTelegraph)

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