With the likely confirmation of Janet Yellen as the next Federal Reserve chairman, consumers should be prepared for ultra-low interest rates to persist for at least another 12 to 18 months. As a current vice chair on the Fed's board of governors, Yellen is widely expected to keep the Fed's easy-money policies intact in the near future if she reaches the Fed's highest post.
Although many Americans may benefit from low mortgage rates, a bullish stock market and increased liquidity in the financial system, families who save a significant portion of their household income in savings accounts are paying a price for these low-rate policies. A majority of large commercial banks are currently offering yields of well under 1 percent -- a fraction of their historical average.
Nevertheless, everyone needs a savings account with an emergency fund of six to 12 months in living expenses, so how can consumers manage their bank accounts to maximize what earnings are available? Here are five tips that can help.
1. Choose your vehicle carefully
Just because rates are low doesn't mean Americans should immediately transfer all their money to an investment portfolio or use their excess cash as a down payment for an investment property. Although the stock market is significantly more liquid than a home, emergencies can require investors to sell their holdings at a loss during market fluctuations.
If security and liquidity are important to you -- which may be especially true if you're nearing retirement -- FDIC-insured deposit accounts can still be a sensible choice. Consider creating a CD ladder or opening a money market account. Both of these options may offer higher yields and greater returns than your standard savings account while still providing some liquidity and easy access.
2. Insist on free checking and savings
You work hard for your money -- shouldn't you have free access to it? With the number of banking options available today, a little comparison shopping could help you find a free checking and savings account with absolutely no monthly fees. If you're having trouble finding these at local institutions, comparing bank accounts online is a great next step.
3. Look online
Online banking has been growing in popularity, and if you haven't looked into this trend, you may be missing out on some of the advantages online banks offer. The trade-off with online banking is physical accessibility versus rates. Although online banks allow you to deposit and withdraw with relative ease, they do not have brick-and-mortar locations. In exchange, online accounts with banks such as American Express Bank, Ally, CIT, Discover and GE Capital are likely to offer yields several times that of the average savings account.
If your savings account is an important part of your retirement nest egg, consider depositing money you do not immediately need into an online savings account to earn more interest. The difference in returns, especially when calculating compound interest, can be significant.
4. Watch for overlooked fees
Most consumers focus only on minimum balance requirements, monthly fees and interest rates, but certain hidden costs that are rarely discussed when setting up your account can increase your banking costs. Two examples are overdraft protection and ATM fees. Paying $30 to overdraft your account by $5 and getting charged a $2 fee for a $20 withdrawal are examples of bad banking practices.
Monthly overdraft protection costs are simple to avoid. Opt out of these programs, always know how much you have in your bank account and limit your spending to what you can afford. Similarly, ATM fees can be minimized with a little financial planning before leaving the house. If you struggle to manage this, choose a bank with an extensive network of ATMs near you.
5. Refuse average interest rates
Complacency could be costing you hundreds, if not thousands, of dollars in lost interest income. Like any other product or service, always research the marketplace to see what competing companies are offering. As an investment of your time, spending 30 minutes to open a bank account that offers higher interest rates -- and thus more income every month -- makes a lot of sense.
Shopping around to find the best bank account for you and your family's financial needs requires some effort, but when you finally need to access those savings, you'll be thankful you paid attention to details.