Savings accounts have displayed an growing popularity as a realistic investment option. This resurgence comes after years of neglect due to historically low annual returns following the Great Recession.
And, with the Federal Reserve embarking on an assertive tightening campaign to address inflation worsened by the COVID-19 pandemic, savings accounts are rekindling their appeal.
For years, the meager sub‑1% annual percentage rates made savings accounts appear unattractive compared to riskier but potentially more rewarding investment strategies.
Nevertheless, as the Federal Reserve raises its interest rate target to levels not seen since the turn of the century (which is currently in the range of 5.25% to 5.50%), annual percentage rates are surging, rendering savings accounts a more compelling choice.
While savings accounts are unlikely to be the sole basis of an investment strategy, their appeal is undeniable.
Washington Examiner quotes Jamie Cox, managing partner for Harris Financial Group in Richmond, Virginia as saying, “If you think about how much people are making in savings accounts now versus what they were two years ago, it’s 300% at a minimum and more like 400% on average.”
For example, Evergreen Bank offers savings account rates of up to 5.25%, potentially yielding over $16,700 in interest over a decade on a $25,000 investment, compared to $26,000 when rates were lower at 0.4%.
Despite these gains, investors must exercise caution come Tax Day. The substantial interest earned on savings accounts may result in unexpectedly higher tax liabilities. Banks, despite the rapid rate hikes, have been slow to raise savings account rates, attributing it to an abundance of deposits.
However, while savings accounts have become more rewarding, financial experts recommend diversifying investments into Treasury bills or money market accounts for even safer options with competitive returns.
Thomas Mathews, a finance professor at Florida Gulf Coast University, is quoted by the Washington Examiner as stating that while savings rates and CD rates have risen, and relatively quickly given the Fed’s action over the past several months, there are still other investment vehicles that consumers should find more attractive. He noted Treasury bills in particular.
“When you place your money in T‑bills, you have the full faith and credit of the U.S. government behind it, so you know that you’re going to get your money back and you’re also going to get your interest back,” he said.
According to Mathews, there is no instrument as safe as Treasury bills, and in fact, T‑bills are paying rates that are even higher than some savings and CDs.
Treasury bills, in particular, stand out due to their rates exceeding 5%, coupled with the advantage of lower state income taxes in certain high-cost states.