{"id":158,"date":"2025-06-18T08:45:43","date_gmt":"2025-06-18T12:45:43","guid":{"rendered":"https:\/\/people.bsu.edu\/econbriefs\/?p=158"},"modified":"2025-06-18T08:45:43","modified_gmt":"2025-06-18T12:45:43","slug":"the-hidden-cost-of-low-yield-savings-by-dr-cecil-bohanon-and-dr-john-horowitz","status":"publish","type":"post","link":"https:\/\/people.bsu.edu\/econbriefs\/2025\/06\/18\/the-hidden-cost-of-low-yield-savings-by-dr-cecil-bohanon-and-dr-john-horowitz\/","title":{"rendered":"The Hidden Cost of Low-Yield Savings \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz"},"content":{"rendered":"

Originally written on 2\/4\/2025<\/em><\/p>\n

A market economy works well when most of its participants have a reasonable degree of self-reliance and resiliency. Few things promote these virtues more than households having a healthy nest egg in safe, liquid investments. A fat savings account provides peace of mind and a fallback in an emergency or economic setback. The old adage of having six months’ spending in reserve is good advice.<\/span>\u00a0<\/span><\/p>\n

One of the unintended consequences of the Federal Reserve holding its short-term interest rate under <\/span>1% for nearly a decade between 2008 and 2017 and again for 2 years during the pandemic<\/span><\/a> is that it encouraged a whole generation of investors not to be very attentive to yields on their cash holdings. It simply did not pay. Consider a household with a nest egg of $20k in an insured bank account that pays an annual interest rate of 0.05%, generating just over $10 a year in income. Under a regime of ultra-low rates, the prudent saver may be able to find an equally safe alternative that yields a 0.075% interest rate. However, this would only generate a paltry $5 a year or 42 cents a month in additional income.\u00a0<\/span>\u00a0<\/span><\/p>\n

Contrast this to today, where cash accounts offer much higher rates. At a 3.90% annual rate, $20k yields $780 a year, a gain of $775 a year over the 0.05% account or over $60 a month. That makes it worth one’s time to chase down higher yields. One need not be well-heeled in today\u2019s environment for it to pay to seek higher yields. Nevertheless, many better-off folks have gotten out of the habit of seeking better returns on their cash holdings.\u00a0<\/span>\u00a0<\/span><\/p>\n

A recent Wall Street Journal article reported, \u201cMany brokerages paid clients minimal interes<\/span><\/a>t (on sweep accounts) even when broader rates were rising.\u201d Sweep accounts are bank or brokerage accounts that automatically move money between a primary account used for immediate expenses and other investment accounts, such as savings or money market accounts, where investors earn interest. Banks and brokers have been slow to increase their rates on these deposits even as broader rates on insured deposits have risen. Not raising rates, of course, enriches the banks. Despite some improvement, recent data suggest that the average rate on \u201csweep deposits under $250,000\u201d is currently a low 0.4%. As one pundit opined: \u201cFolks with cash have to be their own advocate. Don\u2019t expect the bankers to hold your hand.\u201d<\/span>\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Originally written on 2\/4\/2025 A market economy works well when most of its participants have a reasonable degree of self-reliance and resiliency. Few things promote these virtues more than households having a healthy nest egg in safe, liquid investments. A fat savings account provides peace of mind and a fallback in an emergency or economic […]<\/p>\n","protected":false},"author":112,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[462],"tags":[1521,1517,1516,4,1520,1524,94,1523,1519,1522,1515,568,653,1518],"class_list":["post-158","post","type-post","status-publish","format-standard","hentry","category-microeconomics","tag-bank-yields","tag-brokerage-accounts","tag-emergency-fund","tag-federal-reserve","tag-financial-literacy","tag-financial-resilience","tag-interest-rates","tag-investment-behavior","tag-liquidity","tag-money-market","tag-nest-egg","tag-personal-finance","tag-savings","tag-sweep-accounts"],"yoast_head":"\nThe Hidden Cost of Low-Yield Savings \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz - Econ Briefs<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/people.bsu.edu\/econbriefs\/2025\/06\/18\/the-hidden-cost-of-low-yield-savings-by-dr-cecil-bohanon-and-dr-john-horowitz\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"The Hidden Cost of Low-Yield Savings \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz - Econ Briefs\" \/>\n<meta property=\"og:description\" content=\"Originally written on 2\/4\/2025 A market economy works well when most of its participants have a reasonable degree of self-reliance and resiliency. 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