The more the Federal Reserve drops their rates, the lower rates become on Online Savings Accounts. For years, everyone recommended opening an online savings account – and for good reason. For a time, 5%+ APY was common. Earning five percent on your savings / emergency fund was fantastic, especially considering the fact that it was 100% risk free.

Nowadays though, high rates are becoming harder and harder to come by, and become less impressive. For example, HSBC Online Savings only offers 3.05% APY – a far cry from what they used to offer. Don’t get me wrong, I’m not saying that the banks are at fault. After all, they can’t be expected to lose money on our savings accounts. My point is just that the situation is not as rosy as it used to be.

Low Savings Rates Mean More Decisions

If my savings account pays me just 3%, then I have a problem. The US Government officially puts inflation in the 3-4% per year range, which is already worrisome. If I earn 3% ( minus taxes of ~30% ), for an after-tax return of roughly 2.1%, and inflation runs 3.5% – I lose money every year. The purchasing power of my savings account will actually decrease even after the interest that I “earn”. Even worse than that, the government’s inflation numbers don’t include things like energy or food – two very big expenses. And these things are becoming expensive at a much faster rate than 3-4% per year.

Should I stop saving?

Based on the above paragraph, it almost sounds like I should stop saving money. What’s the point, after all? Well, even knowing that my money is worth less year after year, I will still contribute to my savings account. I need an emergency fund. This fund needs to be liquid, easily accessible, and risk-free. I’m willing to give up a small percentage of this cash each year to satisfy those requirements. You should do the same – even knowing the downfalls.

Diversifying your cash

What I won’t do, however, is build a large cash savings account. I am working on diversifying my cash accounts – something that isn’t really talked about anywhere. Instead of going into it here though, I’ll write up another post about it so I can go into more detail. Ultimately though it’s a hedge against inflation, with the idea that I won’t lose as much / any money to inflation each year.