The flipside of low interest rates: Savers earn practically nothing

Historically low interest rates are a boon for home buyers.

But for savers? Not so much. Because banks are earning less on loans, they typically pay out less on savings to make money.

The average rate paid by banks on basic, federally insured savings accounts — known as the annual percentage yield — was a mere 0.05% as of Monday, according to the Federal Deposit Insurance Corp.

That means if you had $5,000 in a savings account, you would earn $2.50 a year on your money.

"It's almost an insult," said Cheryl Costa, a wealth manager outside Boston.

Nor should savers count on an improvement anytime soon. The Federal Reserve has signaled that it expects to keep interest rates near zero for the next couple of years, as it manages the economy through the pandemic and its aftermath.

That is good news for borrowers. Mortgage rates are at historic lows, dropping below 3% for both 30-year and 15-year fixed-rate home loans this month, according to Freddie Mac.

Some Americans, though, have accumulated cash reserves during the economic uncertainty of the pandemic. The personal savings rate spiked to a record 33% in April and was still almost 18% in July, double what it was throughout 2019, according to the federal Bureau of Economic Analysis. It can be demoralizing to salt away cash only to see it earn anemic interest. But it is important to keep in mind the purpose of the money you are holding, said Malissa Marshall, a certified financial planner in Vermont.

If the funds are meant for a rainy day, making as much money as possible isn't the primary goal. "It needs to be sitting there, if you have an emergency," Marshall said.

Other funds that you expect to use within the next year or two — say, for a down payment on a home — also should be kept in a low-risk account even though they are paying low rates, she said.

Online banks, which generally lack brick-and-mortar branches, typically pay higher rates, but still aren't paying anywhere near the 2% interest they offered last year. Now, their rates are typically below 1%, even on so-called high-yield savings accounts.

Certificates of deposit, which lock in a rate for a fixed period, aren't much better, and you will typically pay a penalty if you take the cash out early. Marcus, Goldman Sachs' retail bank, is paying 0.85% on a one-year CD.

"Yes, you'll get a higher rate," Costa said. "But there is the possibility of losing some money."

If you are comfortable with taking some risk, she said, another option may be to invest your cash conservatively, in a mix of 15% stocks and 85% bonds.

You should consider paying down debt at this time, since interest on student loans and credit cards are almost assuredly higher than any interest you could earn in low-risk savings options.