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Your Take: Would a Higher Interest Rate Entice You To Save More?

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Every so often, someone comments on a really old post and I start poking around the archives for old stuff. This time, someone commented on a post from August 2005 in which I suggest that ING Direct increase their rates to entice more customers. Their rate was a “meaningless 3.3%.” Getting 3% (or 2%), let along 3.3%, would be a significant jump from the best bank rates today, which currently sit around 1.0%. Heck, when Ally raised their rates a few weeks ago by a few fractions of a percentage point, it was big news.

But despite such low rates, Americans are saving more. The increase in savings is driven not by interest rates but fear of the future as a result of the recession. When things are good, the future is bright and people are comfortable spending like there’s no tomorrow. Pile on the debt because the good times are rolling, we can pay it off later. The unintended consequence of lowered spending, is a weaker economy. A larger percentage of our economic growth is driven by consumption. Say what you will about the implications, that’s the reality.

So the big question is, would a higher interest rate drive you to save more? Do you even look at the rate? I know I don’t. I save because I want to be able to spend it in the future. Whether I get 1% or 5% really doesn’t impact the decision. It’s like when politicians talk about lowering tax rates in order to spur job creation… that’s just not how I would think as a business owner. You hire when the person you’re hiring can earn your business more revenue than they cost. You hire a new employee when they take some of your workload so you can focus on projects that can generate more income for your business. The taxes, which affect take home income of the profits, matter later in the decision making process. (You could argue that given how small business is taxed, higher rates constrict cash flow. That is true, but it doesn’t necessarily directly impact hiring decisions, it just makes payroll harder to meet and that’s affected by plenty of external factors… anyway, beyond the scope)

A higher interest rate would be nice, especially one above inflation, but it just doesn’t change my choices. Does it affect you?

{ 22 comments, please add your thoughts now! }

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22 Responses to “Your Take: Would a Higher Interest Rate Entice You To Save More?”

  1. Adam says:

    “You hire when the person you’re hiring can earn your business more revenue than they cost.”

    That is exactly what the theory is behind lowering taxes to spur job creation. Lowering taxes reduces the cost of the employee, thereby changing that half of the equation and making companies more likely to hie.

    • Jim says:

      Lowering taxes doesn’t reduce the cost of the employee because you don’t pay taxes on what you pay the employee, it’s removed from your income. Taxes are on profits, not revenues.

      • Lowering taxes does not reduce the employee cost but it does allow the business to keep more of their money and potentially keep more people employed or add more. Of course, the cynics out there could argue that the “evil” business owner would just hang on to and horde their extra money.

        • NateUVM says:

          Doesn’t take a cynic… There are plenty of corporations are currently flush with more cash than they’ve had historically…and they’re still not hiring.

          http://usatoday30.usatoday.com/money/perfi/columnist/krantz/2011-07-20-companies-with-the-most-cash_n.htm

          And it doesn’t even matter WHY you may think they are sitting on their cash…

          http://krugman.blogs.nytimes.com/2011/07/02/cash-is-not-the-problem/

          …the conclusion is still the same… Giving them more is not going to do anything.

          Supply-side doesn’t work. It didn’t work when Reagan ran on it (he subsequently ditched the mantra when it didn’t work and raised taxes). It didn’t work when H.W. Bush ran on it (and subsequently violated his election pledge of “no new taxes”), and it isn’t working now. Guess what, won’t work next year, or the year after that, either.

          As an aside, it should also be mentioned that the “small” businesses that are always in the headlines, you know, the “job creators”, would not be impacted by any tax increase currently being proposed by the administration. By definition, they don’t make nearly enough money to qualify for the higher tax rate.

      • Texas Wahoo says:

        Lowering taxes can both increase the amount of money the business has to hire additional employees and it can reduce the cost of employees. The first is self explanatory. However, it can reduce the cost of employees by allowing the employees to accept less money. In theory, employees will be willing to accept a lower salary if they do not have to pay as much of it to the government. This is one reason why salaries are lower in places like Texas (along with the lower cost of living).

    • freeby50 says:

      So did the 2% cut in social security taxes spur a lot of job growth? Thats a substantial nationwide cut in effective tax rates.

  2. We make a distinction between saving and investing. The purpose for saving is simply separated liquidity: it’s there in case we need it, almost like insurance. Investing is about yield, not liquidity.

    So, because we don’t care about the return on savings so much, the rate doesn’t affect our behavior (except perhaps add a little incentive to do better on the investments).

  3. I agree it would be nice but I doubt I would save any more. I save a pretty aggressive amount as it is.

  4. Long says:

    I don’t think the interest rate affects my savings rate either. When most people think of savings they think of money sitting in a savings account. When I think of savings, I think of all the types of accounts I set my money aside at. These include savings, investments, retirement, etc.

    So in the grand scheme of things, a lower interest rate is better for me because lower rates spur interest in assets other than cash. The interest I earn in a savings account is just a small bonus.

  5. Matt M says:

    It would be great but it wouldn’t change what I save unless rates went up a lot. At 6% I would more money in savings accounts.

  6. The rate probably would not cause me to save more. It would make me feel better about what the account was earning. It could make me choose a savings account over some other vehicle, but probably not.

  7. Jim M says:

    I would definitely save more if rates were higher. At the paltry rates currently available I keep as little as possible in savings.

  8. bloodbath says:

    When your current interest rate equates to $1 every 3 months a (slightly?) higher rate makes little difference.
    I save more as my debts decline.

  9. freeby50 says:

    I think it depends on how you define saving. Do you include money invested in a retirement account or extra money paid towards a mortgage or just money sitting in a traditional bank savings account? The interest rates do impact whree I put my money. For example if bank CDs were paying 5% I’d be more likely to put money there than pay down my home loan.

    In general the % of my income that I save / invest doesn’t really change based on interest rates. I’m not going to go buy more stuff simply cause interest rates are low.

  10. govenar says:

    Couldn’t another reason for saving more be that their income has increased, so they have more excess money to save?

  11. Shirley says:

    I do tend to put my liquid savings wherever the best rate of return available to me happens to be. If there are different tiers calling for different rates of return, I will strive to reach the higher tier. So, yes, the higher interest rate does entice me to save more.

  12. Raising the interest rates in a savings account would probably not make people save more but it might stop them from finding alternatives. For instance, I moved to peer to peer lending to stash away some money and I am making way more interest there than I would in a savings account. Plus compounding your investment is much more valuable this way. Yes there are higher risks therefore this is not an avenue for everyone.

  13. Kris says:

    It all depends. The difference between 2% and 3% would not have any effect. But the difference between 2% and 6% might. These days any type of savings account seems trivial, so its hard to get excited at all.

  14. Ray says:

    These low interest don’t discourage me from saving. To me your either saving or your spending.

  15. Evan says:

    So the big question is, would a higher interest rate drive you to save more? Do you even look at the rate?

    I don’t think it would change my cash flow but if you are telling me I could get 3% risk free in a savings account I would absolutely shift money being invested into that savings account.

    I don’t look at the rate because it is just frustrating lol

  16. Stephonee says:

    I went through this recent with a friend who was keeping a Liz Lemon type amount of money in a checking account. I showed him some online savings accounts in an attempt to get him to move some money to an interest-baring account, and he was instantly put-off by the low rates. Said it “didn’t seem worth it for so little money.” He said that *even though* his money was sitting in a checking account earning NOTHING, and then it turned out it wasn’t even a fee-free checking account! Despite all that, a less than 1% interest rate didn’t entice him to take the 10 minutes to open a new account at all.

    What finally did convince him? Showing him the features of an ING checking account, actually. Once I showed him how I paid all my bills on their interface, how they’ll send a paper check for you for free, and how I can deposit checks with my phone – THAT was much more enticing to him than any interest rate they could offer. Now he has both a checking and savings account with ING, and is ditching his fee-laden checking account ASAP.

    I guess what I’m trying to say is that when we’re dealing with reasonable interest rates, I think people (at least, some people anyway) are more interested in other features, including ease of use, than the small return they’ll get.


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