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Saving money is harder now than when your parents did it

New York Times

Savers just can't catch a break. • Because of persistent low interest rates, anyone looking for decent returns that are also safe has had a tough time this year. Most of the best savings accounts, for instance, don't even top a 1.5 percent annual yield. • Sure, some people have made out nicely in this environment. If you have a hefty mortgage, are able to make your payments and have enough equity, you can refinance into a 30-year loan with an interest rate that begins with the number four. • That still seems like a miracle. But many of the people who qualify for refinancing are already comfortable and the low rates are just a bonus.

It's older people with not much of a mortgage left who are really getting hurt here. The low interest rates keep payouts for newly purchased annuities low, for instance. Insurance companies have been citing the low rates when trying to raise prices on long-term care policies.

And if you're living on a fixed income, you may be spooked by the stock market collapse a couple of years ago and have little appetite left for risk and no slack for further declines.

That's understandable, but the earnings on your savings may not be keeping up with real-life inflation, the kind that includes rapidly increasing health care and other expenses that older people bear the most. And even if you aren't paying higher prices, it's still disappointing to earn so little on money you want to be there when you need it.

If this sounds like you and you're increasingly frustrated, all of this poses a basic question: Isn't there some institution, somewhere, that can pay just a little bit more? What is stopping that from happening?

Here are some things getting in the way.

LOWER PROFITS: Here's the way things are supposed to work and normally do: Banks take in deposits and then lend that money out.

And here's what's happening more frequently now: People are doing a better job of spending less than they earn, but any leftover money is going toward paying down debt, not taking on new debt.

So to the extent that banks have deposits, they can't lend them out in the quantity they used to. Instead, they buy Treasury bills, according to Bill Hampel, the chief economist for the Credit Union National Association. And those don't pay as they once did because of the interest rate environment.

The resulting lower profits make it harder to raise the rates that savers earn.

THE REALITY OF THE FED: If money is so cheap, why can't financial institutions give us a bit more? After all, banks can just get money from the Federal Reserve and pay close to nothing for the privilege.

Well, at least in theory they can, but only so much and only for so long.

"You don't really want to borrow money like that if you're a bank," said Dan O'Malley, who runs PerkStreet, which sets up customers in a checking account with a debit card that can pay back 2 percent in rebates. "It looks bad to regulators, like you didn't have enough deposits to plan your business well."

While PerkStreet has been extremely aggressive with its debit card rewards, it does not plan to top the interest rate tables when it introduces a savings account next year.

CREDIT UNION LAGGARDS: It's a bit surprising that credit unions, which exist to serve members rather than shareholders, don't pay more. Surprising, that is, until you consider what it really means to serve.

Credit union members putting money into certificates of deposit would love to earn more, and they often do get a bit more than they would from a nearby megabank. But members who are borrowers want to pay less for their loans, and they often do.

THE PROBLEM WITH WINNING: But why not just pay us a bit more, even a quarter of a percentage point? Surely there must be an institution strong enough to do that or willing to do it to build good will.

Even in this environment, however, companies may not need all of the potential deposits. Sallie Mae started its savings account and CD offering this year to raise money that it could then lend out for student loans. It is offering one of the best rates in the country, a 1.3 percent annual percentage yield, but it's not alone atop the rankings.

"We don't need more than the amount that is coming in," said Joe DePaulo, Sallie Mae's chief marketing officer.

LAZY CUSTOMERS: Many big banks continue to pay well below 1 percent. Why? Because you let them. Sure, it's a bit inconvenient to open a separate, higher-yielding account and link it to your bank account when you're not getting all that much more for the privilege. But because many people don't bother doing that, many megabanks continue on their merry way, paying absolutely pathetic savings account rates.

Saving money is harder now than when your parents did it 12/11/10 [Last modified: Saturday, December 11, 2010 3:31am]
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