Choosing An Investment Vehicle For Your Money

The interest rates of commercial banks are subject to both market forces and the influence of the Federal Reserve. Whereas banks compete to offer the highest rates to attract customers, they must also simultaneously contend with their ability to gain access to capital at rates which is set by the government. When the economy does poorly, the Federal Reserve has in recent years (and past) lowered interest rates in an effort to boost investment and spending. This is good for businesses and borrowers, but harmful to those who save.

One way of viewing these actions is that the government is discouraging people from saving. The low interest problem savers face is made more acute by the fact that inflation slowly makes saved money worth less. Savers face the low interest rate problem most commonly at large institutional banks, especially those whose business spanned state borders and could leverage economy of scale. This has forced savers to turn to less conventional ways of saving money in low risk investments.

Interestingly, some small-town banks are able to offer higher interest rates than the big banks. This may seem paradoxical except for the fact that the high interest rates are usually tied to restrictive conditions. Therefore, if a customer is willing to put up with such restrictions he or she may be able to take advantage of high rates.

What restrictions should one expect? For example, the customer may be forced to use an ATM card as a debit card for transactions that helps boost the bank's profit from business fees. The customer may also be forced to maintain a high minimum balance coupled with a high average balance.

Another possibility savers have is an internet bank. Some banks do not have physical operations which reduces their cost and increases their capacity to offer high interest rates. Internet banks also must attract customers without the benefit of a face-to-face sales pitch. High interest rates are a way to entice otherwise wary customers. Some websites offer comparisons of internet banks, interest rates, and trustworthiness.

Lastly, one can move his or her money into money market accounts or money market funds at a brokerage firm. A money market account is FDIC insured and is highly liquid still, meaning that one can make a limited number of withdrawals. The interest rates tend to be slightly better with almost no increase in risk. Th money market fund account is slightly different in that it is not FDIC insured, but still generates a good return with less volatility than a single money market account.

When interest rates are low, customers must work hard to find ways to generate interest income. Some of the above tactics will work but it will pay to look at other possibilities, such as purchasing government-backed securities, buying into a short-term bond fund or high yield mutual fund.