Compound Interest Week: Real Interest Rates of High-Interest Saving Accounts |
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On Monday we learned about how long it took to double your money at various interest rates. Yesterday, we learned that in order to come up with the real rate of return we need to subtract inflation.
Personal Finance bloggers love to write about about high-interest savings accounts. As of today, interest rates range from 5.31% to 4.50% on these accounts. It seems that many prefer the 4.50% of ING because their service is considered great. They also give you $25 to start an account. These accounts are great because they often FDIC-insured and guaranteed to make the interest they say they will. They are also great because they preserve the wealth you have. This is important if you may need that money in the short term.
What's not so great about these accounts? Due to inflation, the real rate of return on these accounts is around 1.6% to 2.2%. If we refer back to the chart we used on Monday, we find that the time for money to double is going to be around 35-40 years.
I may be Lazy, but I'm relatively patient. As patient as I am, I'm not that patient. It is for this reason, that I try keep money in investments that earn a better real rate of return.
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It depends on how you look at it. For the most part, money that PF bloggers have in high yield savings accounts are for either emergency funds or for short term savings (for a house, car, etc.). History has shown us that the stock market can be down for several years in a row. So, when it is important not to lose money over 3-5 years, they work great.
I guess the key with all investments is to chose a risk level appropriate for the ammount of time until you think you will need it.
[...] to that introduction, there was also a post on the real rate of return. I then compared the real rate of return in a high interest saving account vs. the real rate of return in the stock [...]