Banks historically have paid low interest rates on savings accounts, but the rise of Internet banking has led to a number of financial institutions offering high-yield savings accounts. Some brick-and-mortar banks have responded by paying higher rates on deposit accounts to attract customers, particularly those with large balances. High interest rates on savings accounts offer significant benefits not only for the individual saver but also for the economy and society as a whole.
Increased Rate of Savings
High interest rates on savings accounts are an inducement for consumers to save more and spend less. Those who save are better cushioned against emergencies, such as a job loss or illness, and they enjoy greater financial stability. Unlike other investment vehicles such as stocks, savings accounts are highly liquid, which means account holders can easily access these funds as needed. Savings accounts are one of the most accessible investments for most people. When higher interest rates are paid on these accounts, a wider segment of the population is encouraged to start saving. These accounts are simple to create and often have a low opening deposit, unlike bonds and other more complex investments that may require a substantial outlay of cash initially.
Increased Interest Earnings
The higher the interest rate on a savings account, the more the account holder will earn each year in interest. Compound interest can boost earnings even more. For example, an account earning 6 percent interest paid quarterly on an opening balance of $4,000 will accrue $240 in interest per year. When interest is compounded, however, the account holder earns $245.45. The higher the interest rate, the greater the earnings and the more impact compound interest will have on those earnings.
Investment accounts with high interest rates often involve a certain degree of risk. Savings accounts, on the other hand, are relatively stable and risk-free, thanks to FDIC insurance. Banks that offer savings accounts with higher interest rates may help sway investors away from riskier investments and into more stable savings accounts.
Greater Funding for Investment
Money deposited in savings accounts provides funds for banks to lend to consumers and businesses. Companies that receive these loans use the funds for capital improvements and new equipment. This leads to expansion, which leads to increased production and the need for more workers. More hiring means more money to spend, which translates into a cycle of economic growth.
Stronger Domestic Currency
When higher interest rates are paid on savings accounts held in U.S. banks, these accounts become more attractive to foreign investors. This inflow of money boosts the value of the U.S. dollar relative to other currencies, which means that American consumers can import goods at lower cost. As this effect trickles down, it results in greater purchasing power for the U.S. population at large.
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