What Is a Negative Interest Rate on Savings Accounts?

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Could a savings account deplete your nest egg?
Could a savings account deplete your nest egg? (Image: Roll of dollars image by Mykola Velychko from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Investopedia.com defines a savings accounts as a deposit account held at a bank or other financial institution that provides principal security and a modest interest rate. Depending on the specific type of savings account, the account holder may not be able to write checks from the account and the account is likely to have a limited number of free transfers/transactions. Investors use savings accounts as a way to make some interest and keep ahead of inflation while keeping their money safe.

Function

Investors consider savings accounts as one of the most liquid investments after cash. Checking accounts allow the account holder to write checks and use debit cards to access his funds, in distinct contrast with savings accounts. Normally, an account holder will open a savings account with the intent of not using the funds for daily expenses. These funds will make a small interest rate on the investment that he hopes will exceed the rate of inflation. However if the rate of inflation becomes higher than the interest rate on the savings account, the the savings account confers a negative interest rate.

Warning

An investor needs to become aware of the state of a negative interest rate environment. When the Federal Reserve has a low discount rate and thus the banks offers a low interest rate on their savings account, this environment should emerge short-lived as the Federal Reserve tries to stimulate the economy to grow. Also, the investor needs to understand the inflation metrics. Most of the government inflation metrics exclude housing. Therefore a consumer may experience more or less inflation than the government statistics report, depending on the status of the local housing market.

Features

Investors typically should not hold savings accounts for the long run as they almost always pay lower interest rates then Certificates of Deposit and Treasury bills. Savings accounts offer superior interest rates to checking accounts and offer a high level of liquidity. Banks offer access to the fund in the saving account by visiting the local branch, via automated teller machines and the Internet.

Benefits

Typically an investor never wants to see a negative interest rate environment as this environment erodes purchasing power. Investopedia.com defines purchasing power as the value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing power emerges as important because, all else being equal, inflation decreases the amount of goods or services the investor can purchase. However, the investor needs to remember that the savings account typically offers insurance from the FDIC and the savings account offers some interest while most checking accounts offer no interest.

Considerations

For the investor willing to acquire a bit more risk, short-term government bonds, money market funds and even inflation-adjusted bonds can provide a high interest rate with very little risk. Now she needs to understand that these investments do not offer insurance from the FDIC, but most consider these type of investment as very secure and safe. Plus these investments have less of a chance of falling into a negative interest rate environment.

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