To begin with it is necessary to mention that people choose to save their money because of the possibility to gain interests for saving money. Some prefer their money to work and benefit, the others just want to be sure that their finances will be kept safe and inflation or devaluation will not affect, or affect slightly the whole sum. When saving money, people select several different types for keeping it. The most effective is regarded to be the investment tool. This is particularly true for the financial reserves that people are planning to use within the nearest time. This category generally entails the bank savings accounts and money market funds which are regarded as the safest short term investments (Bosworth, 2003)
Taking into account the tools for saving money, it is necessary to emphasize that the interest rates are essential not only for the economy but also for personal money savings. It is claimed that the Federal Reserve regularly observes financial conditions and has the capability to increase or decrease the interest rates that trickle down and impact everything right down to the private savings account.
In order to clarify the situation with interest rates, it should be stated that planning for the interest rate modifications and amendments requires definite and clear understanding why these changes are originally made by Federal Reserve. Goldsmith (2001) states that the federal funds rate is the interest rate in which banks charge each other for loans on their excess reserves. Without going into details it may be explained the following: the Federal Reserve requires interest rates for impacting the financial system of the UK. The increase of the interest rate is generally resorted to for making money borrowing less attractive and slow down the growth of the economy, which often causes the devaluation (or vice versa the rapid growth) of the national currency. (Goldsmith, 2001) The increase of the interest rates is also performed because of the fact that the extensive growth and the expansion of business may lead to the increasing inflation. However, when the economy weakens, the Reserve takes the decision to lower these rates. Thus, the direct interest for people of these interest rates variations is in the essence of the economic growth. Thus, people choose to save their money in order to gain these rates, however, the changes of the interest rates according to the changes in the national economy make these benefits difficult to achieve. The fact is that, the rates, which are offered by financial system can not get people interested, as favorable financial situation does not permit to set high rates, as people would massively save their money I banks (and this may lead to the increase of Federal Reserve and devaluation of the national currency), and low rates will not be set during the unfavorable conditions, however, people do not have spare finances to keep them saved.
Robinson (2001) emphasizes the following “when interest rates begin to decline, one of the first places to take advantage is with the high-interest credit cards. It is necessary to keep in mind that when the Fed cuts the rate, it can take quite a few months or even years to trickle down to all aspects of private finances. But by planning ahead for this trend, people are able to position themselves to save money on their credit card payments”.
As interest rates decrease, people gain an opportunity not to mention the current credit card rate decrease automatically. Thus, there is a possibility to get connected with the credit card company and see if there is an opportunity to get a lower rate. The same system works with investment, however, the mechanism is a bit different: people often ask for interest increase, as the higher interests attract more investors and strengthen the economic output of the investment sector of the financial system. If the investment company is not wishing to stir on the investment rates, the investor should start searching for other investment offers. This process of searching and changing of the investment objects may take too much time, however the chances to find the most comfortable conditions for investment increase. Robinson (2001) in his turn states that it may not seem like much to save just one or two percentage points, however, it is necessary to take into account that on larger balances that will take a few years to pay off, this could mean hundreds of even thousands of dollars in savings.
For those people who are going to make some large-scale purchase, decrease of the rates is surely a good thing. This means that the rates will not make people to overpay essentially; nevertheless, if it is not a purchase but the investment, such financial operation will not be beneficial enough. While mortgage rates are not associated with the Federal Reserve rates, mortgages generally follow over time. Surely, low mortgage rates generally mean that people are able to get into the house they want while saving money on interest. This is rather attractive, however, this condition is almost unachievable, as low mortgage rates may be set only during unfavorable economic conditions in order to attract people. Just because lower rates are featured with lower payments, people are meant to use this as a capability to make some personal financial reserve, not as an excuse to buy more home than is needed.
It is obvious that low interest rates are great for borrowing processes, however, when it comes to trying to earn money on the saved reserves, it is not the advantage for the investors or borrowers.
In conclusion it is necessary to point out that if the personal savings account rate is steadily decreasing, it is necessary to search for higher paying alternatives, as the lower interest rates, which are not suitable for saving money by the investment tools will not permit to keep the private financial reserves safe. Instead of saving the account, the bank, credit organization or borrower (which borrows investments) may propose a higher yielding money market instead of the unfavorable conditions. If the local bank is not observing the frames of the set rates, the clients are able to look online at many of the online saving organizations which have better rates than retail banks. Anyway, it is necessary to emphasize that saving money in the context of the interest rates variations is of great importance for both citizens and the state, as it helps both sides to get some income and free finances, which may be invested for some projects.
Bosworth, B. P. (2003). Saving and Investment in a Global Economy. Washington, DC: The Brookings Institution.
Goldsmith, R. W. (2001). A Study of Saving in the UK. Oxford University Press.
Robinson, J. (2001). The Rate of Interest, and Other Essays. London: Macmillan.