The COVID-19 pandemic and subsequent economic downturn have caused the Federal Reserve to slash interest rates to near-zero record lows. While this is great for consumers already planning to buy a home or car this year, savings rates—even for online, high-yield accounts—have fallen drastically, and consumers are left with few stable, low-risk options to grow their savings.
This has consequences for a wide range of people: those who are saving to make a major purchase in the next five years; individuals who are building an emergency fund and are concerned for their financial wellbeing; older Americans nearing retirement age who are concerned about a volatile market, and many others.
Certificates from credit unions—which typically have higher interest rates than banks—offer members a way to save more than they otherwise could, even in unstable and unpredictable economic conditions.
A lot has changed in the last year. In the fall of 2019, interest rates above 2% were common among financial institutions, whereas many leading savings accounts have now seen rate cuts to well under 1%. This is, unfortunately for many savers, unlikely to change. The Fed will probably keep interest rates low for quite some time in an effort to boost the economic recovery. As a result, it’s doubtful that Americans will see their high-yield savings accounts rebound in the near future.
In turbulent times of economic uncertainty, consumers can look to credit unions as dependable institutions who put the financial goals and wellbeing of their members at the center of everything they do. In addition to these benefits, credit unions are also well positioned to offer savings solutions, like higher rate certificates, that members may not find elsewhere.
While savings generally increase when economic uncertainty is high, the COVID-19 pandemic has seen personal savings rates skyrocket to record highs. In 2019, the personal savings rate was 7.6%, but has since exploded to25.7% in Q2, according to the Bureau of Economic Analysis. By comparison, in 2007, the personal saving rate in the U.S. was 3.6% and increased to 6.4% in 2008 following the global financial crisis. The difference is spending habits have changed drastically, with consumer spending down 34.6% in Q2 on an annualized basis. With COVID-19 restrictions in place, Americans are spending less on things like dining out, clothing and apparel, and out of home entertainment. For example, in May 2020, the most recent data we have, Americans spent $48.5 billion on food away from home, according to the United States Department of Agriculture. In May 2019, that number was over $75 billion. With fewer day-to-day expenditures, Americans are saving hand over fist.
Moreover, COVID-19 has shown many Americans the importance of building a strong financial safety net for themselves and their families. With high unemployment numbers and corporate bankruptcies on pace for a 10-year high, combined with limited opportunities to spend due to social distancing restrictions, many consumers may have shifted their attitude toward and approach to savings.
These record-high rates of saving present an opportunity for credit unions to help members both explore strategies beyond a traditional savings account, and build lasting habits that ensure a more secure financial foundation. For those looking for a nearly zero-risk way to consistently grow their savings, certificates from credit unions are their best option for this moment.
Because of their not-for-profit status, credit unions already tend to have higher rates on their savings products than traditional banks. And certificates, with their locked-in rates, offer members a guarantee that their savings will grow—even in turbulent times. What’s more, during the uncertainty that permeates every facet of American life right now, credit unions can offer the personal interactions and one-to-one customer service that will put members at ease and let them know their savings are well cared for.
At Navy Federal, we are proud of our EasyStart Certificate offerings, which come with both market-leading rates, as well as a wide array of term length options designed to meet any member’s unique needs. Navy Federal members can start a certificate with a deposit as low as $50 and choose a 6-, 12-, 18-, or 24-month term. Navy Federal also offers Special EasyStart certificates with interest rates as high as 3.50% APY for a 12-month certificate. And unlike the vast majority of certificates in the industry, Navy Federal members have the option to add more money, with no minimum deposits, at any time to their EasyStart and Special EasyStart certificates.
With certificates, consumers can make sure their savings work harder for them and save for larger purchases in both the short and long term. Whether it’s for a wedding, a down payment on a home, a new car, or a vacation, credit unions can help their members navigate the wide range of certificate and savings options.
As most Americans’ travel plans on hold for the foreseeable future, a vacation is a great example of a purchase well-suited for a certificate. With good planning you can work backward from when you will make purchase flights, book a hotel, or reserve a rental car, and then choose the certificate term length that best fits your needs. The certificate will earn better interest than a traditional, or even high-yield, savings account, and the rate will be guaranteed so you know exactly how much to deposit.
The effects of the pandemic are likely to impact both interest rates and spending habits for the foreseeable future. Thus, consumers’ options to pursue low-risk, stable savings strategies are more limited than in the past. Still, credit unions are the best option to meet their members’ needs and help them reach their financial goals. And certificates are just one facet of a member’s relationship with their credit union. During these unprecedented times, trusted community institutions are uniquely positioned to ensure their members have the financial support and guidance to weather the pandemic and build a strong financial future.