How to Grow Your Child’s Savings Account When the Federal Funds Rate Is Low
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- By Stacey Bumpus
- April 27, 2013
Trying to teach your kids how to save and grow money can be difficult when the money you save doesn’t actually grow. Unfortunately, with a reduced federal funds rate, resulting in savings, checking, CD and money market rates dropping several percentage points within a few year’s time, many account holders have found that they’re lucky to get half a percent from their banks.
Of course, you want to teach the value of deposit accounts to your children by showing how money grows, but how can you do this when the federal funds rate is so low?
The Federal Funds Rate
The federal funds rate is established by the Federal Reserve, which private depository institutions use to determine what they will charge each other for loans. It also is the primary tool used to influence interest rates and the returns offered on deposit accounts.
When it drops, many banks lower the rates they offer as well. And since it’s low right now (currently hovering at 0.25 percent), banks are keeping their rates low, which affects how much you can earn on your deposits.
What’s interesting is some banks decided they would buck the system as the Fed began lowering rates in 2009 by continuing to offer higher rates to keep customers. However, if they were considered risky banks by the Fed, they were sent letters demanding that the rates be lowered, which meant just about everyone with an account saw their rates drop from as high as 4.01 percent to as low as 0.88 percent overnight.
You Can Still Teach Your Kids How to Save
Despite the fact the federal funds rate is still low, you can teach your kids how to save successfully. If you’ve gone as far as showing them how an interest rate affects the accounts, you can also explain to them the real world of deposits by talking a little bit about the federal funds rate (in kid’s terms) and how to still take advantage of an account during this challenging time.
Here are a couple things you can do to make the most of the situation:
- Show that money is still growing: You could create a illustration to show that money is still growing in your kids’ bank accounts. With each interest period that passes you could add more money to the illustration to represent more money for them. If your bank’s interest rate has dropped as a result of the federal funds rate being lower, you could simply reflect this on the illustration.
- Shop around for better rates: Despite the fact that the federal funds rate is low and many banks have followed suit, there are still banks offering high-yield options. So if your bank has significantly reduced your child’s bank account interest rate, you might consider shopping around for a better rate to maximum growth.
As long as your child’s bank account isn’t taking money out of the account, you’re saving money. And as long as they interest rate on the account is greater than 0.00 percent, your child is growing money. So while the federal funds rate may be low and many banks may be following suit, there is no doubt that you can still help your kids save.