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A Saving Grace

Online interest rates bested traditional banks

Image source: Janis Abolins, pikcha - Shutterstock

What's going on?

In a world where interest rates are low – and it looks like they’ll be staying that way for a while – your best bet for making cash from your cash may be online…

What does this mean?

Interest is a reward for saving your money with banks, and low interest rates have encouraged people to look for better returns elsewhere. Recently, newly online banks – like Goldman Sachs’ Marcus – have tried to entice savers with higher rates; in 2018, online interest rates rose more on average than those of traditional savings accounts. Without having to pay rent for branches and wages for bank staff, online banks have lower costs – and they can pass some of those savings (pun intended) to their customers.

Why should I care?

For you personally: Watch out for inflation…

Saving is savvy, but inflation – the rising cost of goods and services – can make it tricky. When inflation’s high, things become more expensive more quickly, which means the same amount of cash in your savings account can buy fewer things over time – unless it’s earning enough interest to keep up. In January, inflation was 1.6% in the US and 1.8% in the UK – so if your cash was in an account with an interest rate of 0.04%, you’d have effectively lost money (as your savings would have grown by less than prices rose). If you’d saved with an online account, however, you might be in the black having earned 2.25%.

The bigger picture: The great rate wait.

On Wednesday, the US Federal Reserve revealed that officials are split over lifting rates. Some said rates should rise only if and when inflation creeps up; others argued for rises later this year, regardless of inflation. Across the Atlantic, the European Central Bank said on Friday that interest rates would stay low until at least September. One analyst put the chances of a rate rise this year at just 15%…

Originally posted as part of the Finimize daily email.

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