There's a good chance you're making a simple mistake when it comes to money, Vanguard says. How to make sure you're not missing out on any gains.
A Vanguard survey shows 57% of people earn under 3% on savings, with many unaware of better options.
Interest rates may drop soon, but returns should stay above inflation, which is currently 2.7%.
With short-term interest rates still relatively high, it's a great time to earn essentially risk-free, inflation-beating returns on your cash. But a majority of Americans are missing out on these easy gains, Byrne told Business Insider.
According to a Vanguard survey of 1,011 respondents published in March, at least 57% of Americans are earning less than 3% a year on their cash savings. Eight percent said they have their savings in physical cash, meaning they're yielding nothing; 16% are earning less than 1%; and 33% are earning 1%-3%.
This suggests that even if savers are aware enough to move their money to an account or product with a higher interest rate than the standard checking or savings account — the annual yield on which is under 0.5% — they're still not capitalizing on the highest-yielding products on the market.
"If it's below 3% you should be looking," Byrne said. "You should be finding a vehicle that has a better rate than that, and also has the features you need, whether that's FDIC insurance or the ability to move money seamlessly."
High-yield savings accounts, certificates of deposit, and money market rates can vary by institution, length of deposit, and the amount deposited.
Money-market funds, which hold cash equivalents like ultra low-risk short-term Treasurys, are more liquid than other products CDs, for instance, often force investors to pay a penalty if they pull their money out before the maturity date.
Here are examples of some money market accounts — which you can invest in through a brokerage account with a firm like Charles Schwab or Fidelity — yielding above 4% as of August 1, according to Bankrate:
The Vanguard survey data showed that 60% Americans feel they don't fully understand the interest-rate landscape and how it affects their savings.
"Not only are they sort of not even clear on what APY is and how it affects their savings, but, likely because they're not clear on it, they're earning less than they could be in a more high-yielding product," Byrne said, referencing the common acronym for annual percentage yield.
Young savers are less likely to understand interest rates and more likely to be missing out on returns, the data also shows. Sixty-seven percent of Gen Z savers are earnings less than 3%. Among millennials, that number is 59%.
Byrne said that savers often miss out on these returns because switching banks or moving money to different accounts isn't top of mind.
"You would be shocked at the number of people who are still in the bank account they opened up when they were in college or even high school, because they needed somewhere to put that first paycheck," Byrne said. "And then inertia kicks in and you've got bills connected to it, and life just moves really fast and many things seem more important."
It's unclear how long cash-equivalent investments will continue to deliver strong returns. Short-term interest rates, which track closely with the fed funds rate, are expected to come down in September and later this year. Markets are placing a 99% chance that the Federal Reserve will slash rates by 0.25% next month.
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