What’s a Dollar Worth?
If you had a dollar in a savings account all year, it’s probably worth less in December than it was in January. What do I mean? A dollar that sat in a savings account can’t buy the same value of things that it could earlier in the year. In other terms, you’ve lost purchasing power.
A Lack of Interest
The year started weak with very low interest rates in general. Because interest rates influence your banking returns, the banks were keeping rates low “in sympathy”.
You can see the actual interest rate movements at the Federal Reserve’s site. Fortunately for bank savers, the Fed raised rates throughout 2005. You’ll see that rates were even lower in 2003-2004. However, savings accounts didn’t seem to participate in rate increases until recently.
Gas Prices
Savings account rates didn’t increase quickly, but the price of gas sure did! A combination of increased global demand, a season of travel, and a series of storms meant that we’d have to pay a lot more at the pump.
If you weren’t already frugal, you probably found a few ways to save on gas during 2005. It's hard to tell what got depleted faster -- your savings account or your gas tank!
Lessons Learned
It’s easy to simply complain. Now let’s talk about how some people did a little better in 2005. Internet bank accounts were a good alternative to traditional savings accounts – they’re liquid, safe, and easy to use. Online banks competed for your savings dollars. If you haven’t already linked your checking or savings account to a higher-yielding account, do it today.
Savers who were willing to lock up their cash had good luck in CDs. CDs offered rates higher than savings accounts, but long-term CDs never really took off. Maturities under 1 year were best in my opinion.
Of course, it’s hard to expect phenomenal returns from a safe bank instrument. Savings accounts have their place but we have to make sure we don’t leave too much idle cash laying around.
