Bank CD Interest Rates vs Inflation

Around eight or so years ago I distinctly remember getting paid 4% interest on our simple savings account with Washington Mutual bank.   That was a promotional deal of some sort if I recall right but I didn't have to do anything special to get it.    Now it seems like that kind of interest rate on savings is something of the distant past.     I think we're getting 0.000001% from our bank right now.   Or more or less close to it.   1 cent a month.    With the interest rates we've got right now your savings are not keeping up with inflation.    But is this the norm?     I remember that 4% interest rate not long ago and that should have been able to keep up with inflation.

I couldn't find good history of interest rates for CDs or savings specifically.   But I did find Federal Reserve H.15 tables for interest rates on 3 month commercial paper.  
I got the inflation figures off the BLS site.

For both I'm representing the annual averages of the interest rate and the inflation rate.

Here's a chart showing the interest rate versus inflation for 1997 to 2016:

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You can see there that the rates paid by banks were quite a bit higher in the not too distant past.

For about the past 10 years we've had interest rates that are pretty low and don't keep up for inflation.   But if you look back to the previous 10 years from 1997 to 2006 the opposite was true for many of those years.  

Overall for the 20 year period the annual interest rate averaged 2.4% and the inflation rate averaged 2.2%.

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Chase Bank CD Rates are Really Awful

We have a checking account with Chase.   They took over Washington Mutual some years ago after WaMU failed.   Chase has been 'good enough' for us so we've stayed with them.  However their interest rates are not good.   I've been meaning to put some of our savings into a CD to try and make at least a little bit of interest off them.   I know that Ally bank has decent CD rates and you can get 1% or more there.   But I thought, hey, why not just open a CD with Chase...  The answer is that Chase is currently paying 0.02% for 12 month CDs.   You lock your money up with them for a year and you get 0.02% out of it.   Let me put that another way.  A $1000 CD with Chase will make you 20¢ in interest.   Awful.     Interest rates are low but theres really no reason for them to be THAT low.  Chase could at least try to pretend to be competitive.   I mean they may as well make it 0.0000002% as far as I'm concerned, they'd still technically be paying interest right?    


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Why Don't Some People Have Bank Accounts?

You may have heard about the 'unbanked'.   The unbanked are people who do not have a bank account.   They don't have a checking or savings account.    The FDIC has a whole web site discussing the topic.   In December 2009 they wrote a report all about the demographics of and reasons for people being unbanked.

I've pulled out of that 2 specific charts showing why people don't have bank accounts.   There are 2 groups among the unbanked, first the people who have never had a bank account and second are the people who once had a bank account but do not currently.

First lets look at the never banked.  

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Now the previously banked:

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All this data is from the FDIC report dated Dec. 2009.   Note that the numbers add up to more than 100% because people could choose more than one reason so some people have multiple reasons.    The sum of each is about 137% so about 2/3 or more of the people only gave one reason.

As you can see for both groups the top reasons are lack of money, lack of need and high fees.    That seems to cover most people.   Past that though there are a variety of reasons people don't have bank accounts.  Everything from not trusting banks, having language problems and not having a bank nearby.
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Credit Unions versus Banks : Not Exactly Win versus Fail

One of the recent trends I've seen is bashing of mega banks on one hand and blind gushing praise of credit unions on the other hand.   The way people talk you'd think that credit unions are miles ahead of large banks in terms of service and offerings.

Surely credit unions do a better job as a whole in the area of customer support and many large banks have poor service.   If you generalize its easy to conclude credit unions are better.  But.. its not as if credit unions are perfect and never have flaws.   I myself quit a credit union years ago cause they started charging stupid fees that banks didn't charge.  Kind of ironic that is the exact reason many people are switching away from banks today.  

According to a large survey of over 6000 customers done by  PrimePerformance the satisfaction levels with banks is lower than credit unions, but not by a huge amount.   They found :
" 88% of customers at Credit Unions and Small Banks were satisfied with the service they received; only 1% of Credit Union and 2% of Small Bank customers were dissatisfied. Large Banks and Wells Fargo both ranked in the middle with 78% of customers satisfied and 4% dissatisfied. 74% of Bank of America customers were satisfied, with 4% dissatisfied."

As a group credit unions and small banks are 10% ahead of large banks.   Thats significant.  But we're talking about a 10% gap in satisfaction not a 90% gap.    There are still 12% of credit union customers who are not satisfied.    Thats a pretty significant minority don't you think?   I mean 88% is a B grade not an A+.  

You also have to consider that not all credit unions are created alike.  As a large group the satisfaction levels are high but there are certainly going to be individual credit unions that have lower customer satisfaction than large banks.   There are thousands of credit unions with different management and widely varying quality levels.   The average credit union may provide better service than the average large bank but that doesn't mean that every credit union will perform better than every bank.

If you look at the detailed study from PrimePerformance you can see something interesting in the regional break downs.   In the Southwest region including Arizona, New Mexico, Oklahoma and Texas the credit unions don't have as many happy customers.  Credit unions in the Southwest US states have lower satisfaction ratings than large banks and small banks.  Southwest credit unions had a 83% satisfaction rate there versus 92% for small banks and 85% for large banks.    In the Western states the credit unions also fell behind small banks.   There credit unions had 85% satisfied customers versus 89% satisfied customers at small banks.   

In California credit unions do better than banks in broad satisfaction survey as well.  But if you look at the detail in a PrimePerformance survey on California market specifically you'll see the top rated credit union there actually had more customers with problems than several megabanks.   The percent of customers with problems or complaints in the past 12 months was 18% at Golden 1 Credit Union.   That was beat by Bank of The West and Union Bank both at 12% as well as Wells Fargo and U.S. Bank who had 17%.  To be fair, Golden 1 Credit Union did better in all the satisfaction ratings so they have more happy customers.  But its notable that they do have more customers who've had problems than many large banks.   Maybe the credit union customers are more forgiving of problems.

Of course I'm not arguing that credit unions are bad.   There are a lot of good credit unions out there that do a great job.   As a group they have higher satisfaction than any of the major mega-banks.     My point is that credit unions aren't infallible and their performance isn't really miles better than a typical large bank.  Individual credit unions may very well be worse than the large banks in their customer satisfaction.  Even the credit union with the highest satisfaction rating in California has nearly 1 in 5 customers with problems and complaints.

Bottom Line : Credit unions may do better than banks as a whole, but credit unions aren't all awesome.
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SaveUp : Reward Your Saving with Free Prizes

A new financial rewards site named SaveUp is starting Beta today.   SaveUp gives people rewards for saving money and beating down their debts.   You can use this link to sign up for the beta and get 100 free bonus credits.   



Here is what they have to say about it :

'SaveUp is a new FREE way to reward you for your responsible financial actions. Earn credits by depositing in your savings accounts and making payments to reduce your debt. Use these credits to play for real prizes like new cars, vacations and a $2,000,000 grand prize. Over time you can earn badges, take challenges and accomplish goals which make you more financially fit.'

I was able to check out SaveUp in a limited early test run.   Its easy to get setup and the site is simple to use.



You can gain credits through several ways.   You get a certain amount of credits for connecting SaveUp to a savings account or credit card account.    You can get more credits by meeting certain challenges or by doing things like watching educational videos.  One challenge presented was to not use my credit card for two days.  Watching a 2 minute educational video will get you credits too.  All of the various ways you get credits help you facilitate or build on your saving.  

There are three ways to play for prizes on SaveUp.   You can do an instant win, a raffle or the jackpot lottery.   

Instant play is kind of like a scratch off lottery ticket or a game of Keno.  The instant play prizes can be big items like a new car or an expensive vacation.  You pull a random number and see if your digits match the winning number.  If you get enough matching numbers then you can win a prize.    The game is played instantly.   The instant games have a grand prize if you match all the digits or smaller value prizes for matching only some digits.  For example, matching 6 out of 10 digits might win you a $25 value prize and matching only 2 out of 10 digits would get you 5 of the SaveUp credits.

The Raffle games work like any other raffle.   You spend your credit to get a raffle ticket.   Then periodically the drawing is held and a winner announced.   Typical prizes are $100 gift cards or things like a iPad valued at $500.  They have various major merchants like Macy's.

Jackpot play is like getting a lottery ticket for the power ball.   The chances of winning are low but the prize is huge.   They have a $2,000,000 jackpot prize.  I've mentioned before that I actually enjoy playing the lottery.   I think its a fun way to fantasize about what you'd do if you won the millions.   Of course I don't expect to win and its not part of my retirement planning.   Playing the SaveUp jackpot is a free way to satisfy my lottery enjoyment.

The only 'negative' I could come up with personally is that they limit the number of times you get to play each day.   So you can only enter drawings, lotteries or do an instant win game a certain limited number of times.   I would have liked more plays in a given day.   But this setup has merits since it keeps you coming back more often to get your daily plays.    The fact that I wanted to play more is not really a bad thing.  

I would certainly recommend SaveUp.  Its FREE and it certainly doesn't hurt to play free raffles or enter a free lottery game.   I think SaveUp can help incentivize some people to save more.   Thats its overall goal and I like the idea.

Bottom Line : SaveUp is an innovative new free program where users can win prizes and help encourage their personal savings habits.

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Historical CD Savings Rates vs Inflation

The other day I talked about historical CD rates and today I will look at CD rates versus inflation.  Right now savings rates are not really keeping pace with inflation.   Thats unfortunate since if you want to save money in a safe CD or savings account your money will lose value even after the interest paid on your savings.

I took the CODI rates from Mortgage-x and then I got the CPI inflation numbers from the BLS.     Here is the CODI versus the CPI.

Usually the two are not too far apart.   However there are periods when theres a few % difference.  Sometimes the CD rate is higher than inflation and sometimes its lower. 

Now lets subtract the inflation rate from the CD rate.   This will give a rough estimate of the real rate of return from CD savings.   The resulting numbers are shown in the graph below.

As you can see several years the real rate was negative.   That means that your savings interest payments aren't keeping up with inflation. 

In 10 out of 44 years the real rate of return was negative.     The worst year was 1979 when the real return was -2.78% and the best year was 1982 when the real return was 9.40%.    During that time inflation was very high.   From 1967 to 2010 the average real return is 1.91% and the median annual real rate of return is 2.17%.

Bottom Line : Over the long run then I think its fairly reasonable to expect CDs to return about 2% over inflation. 

Certificate of Deposit rates over History

Right now Certificates of Deposit (CD's) pay pretty low interest rates.  You'd do pretty good to get a CD paying over 2% and shorter term CDs pay a fraction of a percent.   In years past when interest rates were higher CDs paid a lot better.  

Mortgage-x website has data on historical mortgage indexes.   One of the indexes is the Certificate of Deposit Index (CODI)   Mortgage-x defines it as "The Certificate of Deposit Index (CODI) is the 12 month average* of the monthly average yields on the nationally published 3-Month Certificate of Deposit rates. " 

I got the CODI numbers from their current index lists and their historical CODI data.

Here's a chart showing the interest rates from 1967 to 2010. 

I am only showing the rate for the month of January of each year just to keep the chart less cluttered.   There is some fluctuation in rates month to month but mostly they are gradually drifting up or down.    Showing January rates only is pretty representative for the long term trend.   If you want you can see the monthly data on the Mortgage-x website.

Watch Your Savings Account Rates

I haven't checked the rate on our savings accounts lately.   I just checked them and found that our savings account at Chase was only paying 0.5% interest.   I knew that our rate wasn't the greatest but it used to be a lot more competitive.   We originally banked with Wamu and a couple years ago our rate was 4% which was great.   The reason Wamu's rate was that good was they were nearing failure and trying to get new accounts or hang onto those they had.   When Wamu was bought out by Chase our rates dropped and then kept dropping.   Any way, long story short Chase has cut the rates so they are not nearly as competitive as they were a little while ago.  

I moved the bunk of our savings over to ING Direct.  I also have an ING account which I've had for many years now.   ING is currently paying 1.1% in my savings account which is 0.6% better than the rate at Chase.    So the ING rate is over double what we've been getting at Chase.

I moved $40,000 from Chase to ING.   At Chase that $40,000 would get us just $200 a year in interest.  At ING we'll get $440.  That means moving the money to ING from Chase will net us an extra $240 a year (before taxes). The entire process of moving the money including discussing it with my wife to make sure we both agreed on the idea took no more than 20 minutes.

$240 is not bad for 20 minutes of my time.

Now I'm not going to act as if this is an amazing discovery or anything special.   I really should have done this earlier of course.   Better late than never.   The point here is just to keep your eye on your savings rates so you notice if one of them drops a ways.   Its easy to get occupied with life and not even notice if your rate drops. 

The more you have in savings the more the interest rates matter.   If you have very little in a savings account then don't sweat it.  If  I only had $50 in savings then it really wouldn't matter if they paid me 1.2% or 0.2%.  But since we've got a large cash reserve, the little differences in interest add up to quite a bit. 

Also, I could make a little more money by opening a new account with one of the banks offering 1.3% or 1.4%.   At 1.4% I'd be getting another $120 over what ING is paying.   However those highest rates are usually 'teaser' introductory rates that tend to go down over time.   ING has consistently competitive rates.  
As long as my interest rate is fairly competitive and consistently high I'm happy with ING.