Why didn’t a higher interest rate encourage me to save more?
- Recently, my savings account provider told me that the interest rate I receive on my deposited funds is increasing.
- I chose not to increase my savings despite this, as the APY is still quite low considering the big picture.
Like most people, I have money in a savings account. I recently received an email from my bank telling me that the interest rate on my account was going up. This is not surprising given that the Federal Reserve has recently raised interest rates.
Although a higher rate is good news, even if it was anticipated, it will not change where I put my money and I will not deposit more than expected in savings despite the fact that the money I put in the now expects to achieve higher returns.
Here’s why I’m not changing my deposits and saving more money to take advantage of the higher rate.
1. APY is still very low
While I’m glad my interest rate went up on my High Yield Savings Account, it only went up to 0.75% APY. That’s still not a great return on investment, especially with inflation that’s over 8.5% right now. Since I don’t earn much on the money invested, all the dollars in my savings account are currently losing a lot of purchasing power – and that will remain true even with my new higher rate.
The reality is that I know I can invest in assets that have a low risk of loss over time and will yield a much better rate of interest. A good example is an S&P 500 index fund, which has consistently provided average annual returns of 10% over time. That’s a far better return than any high-yield savings account can offer, and with fairly minimal risk since an S&P 500 fund gives me exposure to 500 of the largest and most well-known companies in the United States.
2. I already invest the amount I need for short-term goals
Another big reason I don’t increase my savings is that I’ve already decided how much to contribute to this account to achieve my goals and I’m putting the amount I need into my account.
You see, I’m willing to accept the low returns that savings accounts provide on some of my money because I will need it soon or want to be able to access it whenever I want. I don’t want to put my emergency fund on the stock exchange, for example. I also don’t want to invest the funds I will need over the next five years, because I might have to withdraw money when the market is down, and so I might end up losing investments because I can’t not wait for a recovery.
The amount I save is not determined by the APY offered to me, but rather by the amount of money I have decided to put in a risk-free account. And that calculation doesn’t change just because my APY is a bit higher.
A slight increase to 0.75% APY isn’t attractive enough for me to use a savings account as an investment vehicle rather than a place to store cash for the short term, so my financial habits will not change at all despite this good news of a higher rate.
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