All year round the Federal Reserve makes adjustments to its lending rates to commercial banks, which in turn has an impact on the rates a commercial bank offers its customers. When the economy does poorly, for example during the bubble bursting of the dot com era and the 2007 real estate debacle, the Federal Reserve lowered the rates severely to stave off a recessionary economy. This was a positive state for companies and small businesses that need to borrow money to survive, but was a negative for people who were net savers.
In fact, one can think of the economic stimulus as a punishment to the frugal, cautious savers. The saver will find that most avenues for depositing and storing money offer poor interest rates during these times, especially true at large banking entities that have competitive economies of scale. However, it turns out that with a little effort the conscientious saver may be able to find a non-traditional avenue for low risk investments and storing money. We consider some of these possibilities.
A smaller bank, paradoxically, may have better interest rate checking and savings accounts. One might ask how can a small bank offer better rates than the conglomerates who have a much bigger pool of deposits with which to work. The answer is that the small bank needs to attract customers, and in order to give them higher interest rates, the small bank will often impose strict requirements on the customer who wishes to receive these favorable rates.
For example, the banking client will often have to set up direct deposit for the monthly paycheck with the small bank guaranteeing them a steady stream of increasing deposits. Moreover, the small bank might demand that the client use the ATM card as a check card for transaction purposes which increases the fees the bank can collect from businesses.
Another option for those who are braver is the internet bank. The internet banking industry exploded in the late 90s and early 2000s. Some of them were offshoots of brick-and-mortars and others were truly internet only. Since such banks have lower operating costs they can afford to offer customers better interest rates on regular checking and savings accounts.
A third possibility is for one to turn to a money market account at either a bank or a traditional financial firm. A money market account offers slightly higher interest rates with very low risk. In addition it is insured in the same way as checking and savings accounts by the FDIC. Withdrawals can be made but are usually limited to some number within a 6 month period to comply with SEC definitions and regulations.
During times of low interest rates, one must be prepared to think outside the box for finding a way of saving money and making the money grow. The tactics discussed above are but three examples of a bigger universe of financial options, among which are bond funds and high yield mutual funds.
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