Don Cunningham: Remember Savings Accounts? Times Have Changed
By Don Cunningham on November 13, 2019
This column, written by LVEDC President & CEO Don Cunningham, originally appeared in The Morning Call and on the newspaper’s website on Nov. 13, 2019. (Click here to read Cunningham’s previous columns.)
Don Cunningham
Remember when banks used to pay interest if you saved money with them?
It was a cool thing.
I explained this historical concept to my 23-year-old son last weekend. It was a bit like describing that pictures were once taken on film, processed in a dark room and, if the back of the camera opened, all was lost.
“Huh?”
I explained the days of “passbook savings accounts,” which, I believe, were so-named because it was understood that all banking activity would be recorded in the “passbook” provided to you by the bank. It was equally understood that only the uncivilized and unwashed would not write down banking transactions.
Not only were all transactions to be recorded, all passbooks entries were to be “balanced” against the bank’s printed statement each month. This task was required, just like taking out trash. I still do both.
To say thanks for the money, and for recording it in your passbook, the bank gave you like 3%-4% interest. That means a lousy $100 savings account became $104. It also meant you got to write down $4 in “interest earned.”
It was a cool thing.
You didn’t mind that the bank turned around and lent your money to someone else for, let’s say, 6% or 8% and kept the vig.
That’s how they made money. The spread was fair. Everyone was happy.
Banks encouraged savings. Interest rates encouraged savers.
I opened a savings account at First Valley Bank when I got my first newspaper route in seventh grade. I was 11. I rode a bike to deliver the newspapers and to the Miller Heights branch to make deposits when I collected from my customers.
I remember wishing I had extra money for a Christmas Club Account, a separate savings account. I didn’t even try to explain this concept to my son.
My grandparents, parents, aunts and uncles all had Christmas Club Accounts at Keystone Savings & Loan in Bethlehem. In our working class family in the 1970s, and I assume most others, only houses were bought on credit. Christmas created a need for extra cash for gifts, and the only way to have the money in December was to save it all year.
Keystone had Christmas Club Accounts where a saver deposited a set amount each month. They guaranteed some interest if you made all your deposits. It was understood that all funds would be withdrawn in December.
No fees, no penalties. Most importantly, no gifts bought on credit. Saving throughout the year paid for the holidays.
Keystone encouraged these accounts. Advertised the program. And paid interest to help.
Times have changed.
Most banks today advertise credit cards, not savings accounts. The ads encourage buying gifts, trips, anything and everything on credit. You’re teased with bonus points and cash back.
Here’s a secret: There’s no bonus in buying on credit unless the balance is paid before interest is incurred.
If advertised at all, interest rates are buried in fine print. This week’s average credit card interest rate is 17.27%. In contrast, the average savings account rate this week, according to the FDIC, is 0.09%.
Today’s is an economy of consumption at all costs. It’s rare for any politician, economist, business writer or banker to show concern for, or even discuss, what low interest rates do to savings. The focus is on borrowing and spending and keeping the economy hypercharged with low rates to drive consumption.
The same approach is now the path of choice of both political parties to manage the federal budget. There was a time when debt mattered. It was once an issue in elections. This year’s budget adds $1 trillion to a federal debt of $22.6 trillion. It’s a government of consumption run on credit cards.
To be a saver today is like being on the debate team in high school and trying to sit at the football team’s lunch table. You’re out of vogue with limited options.
In addition to low bank rates, Treasury bond yields average about 2.5% now compared with an average of 6.5% since the 1970s. The result is being forced to bet even more on buying stocks, through 401(k)s and individual retirement accounts, to generate savings for retirement.
I’m aware of the long-term statistics and performance of the stock market — and participate fully — but nothing lasts forever and timing is everything.
There’s a discipline that develops in watching a bank account grow by a steady amount that encourages more savings. I’ve encouraged my son to contribute to his company’s 401(k), deposit at least $50 a paycheck in savings and buy on a credit card only what can be paid each month.
Good habits can be started just like bad ones.
There’s good news in that a few online banks now pay 2.2% on savings with no balance required. He won’t get rich but he’ll stay out of debt.
And, hey, no need to write anything down in a passbook. They don’t make those anymore.
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