Are you ensuring that you’re avoiding these mistakes to ensure your savings accounts are working toward your personal financial health?
As the President and COO of Save, an SEC-regulated financial adviser, a goal of mine is to ensure that our customers are optimizing their money to work for them. With Market Savings, our customers can earn market-driven returns1 while their deposits are FDIC insured.†
Whether you are using Market Savings or a traditional savings account, don’t make these four mistakes:
Mistake 1: Don’t overpay taxesb
In the U.S., savings account interest is taxed as ordinary income. This tax treatment means, depending on your income level and the state that you live in, that your after-tax interest will be from 10% to as much as 51.7% less.
For example, a high earner living in New York City who places funds in a savings account earning 4% can expect to receive 1.93% after taxes.
Because the Market Saving’s yield is driven by investments whose terms are greater than one year, its yield is taxed as long-term capital gains.b Tax rates for long-term capital gains range from 0% to 20%. This tax efficiency compared to traditional savings accounts is a significant long-run advantage.b
Mistake 2: Don’t let inflation shrink your savings
Over the last 20 years, savings accounts have had a negative yield versus inflation. To illustrate this point, from the period ending in December 2002 to February 2023, the average yield of a 1-year CD was 1.1% while the average inflation rate was 2.5%a. When savings accounts or CDs underperform inflation, the value of the dollar deposited is worth less a year later than its initial value. In such periods, a deposit made in a savings account effectively guarantees a loss of value.
Even today, with savings account yields among the highest in recent history, virtually all yields are less than the current inflation rate as measured by the CPI. When one considers taxes and inflation, savings accounts have a difficult time beating inflation.
So, what’s the solution? Equity markets have demonstrated the ability to outperform inflation over the long runb. As a result, market-driven yield might offer the best inflation-beating potential.
Mistake 3: Don’t overvalue large banks
Banking is a highly regulated industry with a great deal of oversight. Additionally, FDIC insurance provides coverage for any deposit held at a bank. With all these protections in place, some savers still forgo higher interest rates available at lesser-known banks in favor of the national brands. The cost in potential interest earned can be significant with some national brands currently paying as little as 0.01% while, as of this writing, the highest-paying savings accounts are near 4.75%c.
Save only partners with banks that we believe are financially sound institutions. Webster Bank, N.A., Member FDIC, is a leading commercial bank with over $70 billion in assetsd.
Mistake 4: Don’t overvalue short-term liquidity
Unless you know of a specific need on a specific date, odds are that your cash will remain in a savings account longer than you originally anticipated. Given that CDs and other investment options pay higher rates for a willingness to place the deposit for a longer term, overvaluing short-term liquidity can have real costs over time.
Market Savings attempts to address this problem by asking customers to target an investment term of one year or five years. Choosing a term gives the economic benefits of a willingness to hold a deposit for a longer period. However, if the cash is needed sooner, customers can withdraw their cash keeping in mind that depending on the market conditions they may forgo market gains or bear early withdrawal costs.
To start optimizing your savings with market-driven yields, sign up for Market Savings.
a Sources: Ibbotson Yearbook, Bankrate
b From 12/31/1960 to 2/28/2023 the S&P 500 TR outperformed inflation as measured by the CPI in 74% of all rolling 5-year periods and 80% of all rolling 10-year periods. Source: Ibbotson Yearbook.
c Source: https://www.bankrate.com/landing/savings/rates 4/14/2023
d Source: https://public.websteronline.com/about
