You've heard of the magic of compounding, right?
If not, here's a quick version. Let's say you have a savings account that earns 1% per month. (Don't laugh too hard. My dad had one that paid this rate at one point.) Let's say also that you put in $1,000 at the start of 2012, and never add anything more. According to the Rule of 72, after about 72 months, I'll have about $2,000. In another 72 months, I'll have $4,000. In another 72, $8,000. The amount in the account doubles each 72 months it sits there. This happens because the amount that I'm basing the 1% earnings on increases a little bit each month, until some day, it gets really fun. Almost like magic.
The amount of magic depends on the amount of the rate
Are you still laughing about when I proposed an account that earns 1% per month? I wouldn't blame you. Some of the higher interest rates for checking accounts now are about 1% per year. About all we can say about these kinds of rates is that they're better than nothing. (If you're earning nothing on your money, try to earn something on it.)
At rates of 1% per year (or less) the magic still happens, but the magic isn't exactly making-a-jet-plane-disappear magic. The doubling would still happen, but it would be almost the end of the century before that happened. And to boot, your $2,000 might only barely buy a nice suit. Break out the champagne!
Banks are scared to lend now. They're reeling from the shakeout in 2008. As a result, interest rates on savings accounts and checking accounts goes down as well. And the fees get tacked on. It's just not a magical time to be a saver.
What's the key to building wealth, then, if it's not through saving money?
Putting money in the bank is low-risk, but it's also low-reward. Now, it's extremely low-reward.
The key, I think, is to take calculated risks, and work to produce something. Find a need, and serve customers to fill the need. If you can deliver on time for the price agreed on, that's a lot more than many businesses do.
This isn't “stick money in a bank account and it grows while you watch Twilight” easy, but that's what the times demand. There's barely any reward for doing it this way today.
Maybe the magic will come back into compounding, but until then, make your own magic.
The rates are just pitiful right now, but that hasnt discouraged me from saving!
With interest rates so low, you have to look at other choices such as the stock market, real estate or commodities. It is the only way to use compounding and build up your investments.
I agree with you that they are dismal. The nice trade off is the low interest rate for loans, especially mortgages. Then again, if you aren’t in the market for a mortgage, it doesn’t help much.
How about opening an account with an Australian bank and earning interest here instead? Current rate is around 5.5 – 6% I guess there are probably some international fees or laws that restrict this sort of thing, probably something I should look into and write about 😉