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Trap 1: Low-interest savings accounts

Many middle-class Americans are drawn to the perceived safety of traditional savings accounts offered by big banks. There’s just one problem: These accounts often come with incredibly low interest rates, often hovering just above zero. Secure? Yes. But they do little to grow wealth over time, while the banks use your money to make loans with returns far greater than what you’ll get from your near-zero annual percentage yield (APY) savings account.

The Federal Deposit Insurance Corporation (FDIC) says the national average interest rate for savings accounts is a mere 0.46% as of August 2024. Though inflation is cooling, it still consistently outpaces this interest rate, which means the real value of the money you hold in these accounts is actually going down over time.

The low-interest environment essentially means your money is losing purchasing power every year, unless you are investing it in a way that covers that loss. For example, if you have $10,000 in a savings account earning 0.42% interest compounded yearly, you’ll earn just $42 in a year. If inflation is running at 3%, your money’s purchasing power has effectively decreased by about $250. Over time, this erosion of value can significantly impede your ability to meet long-term financial goals, such as retirement or funding a child’s education.

Fight back by considering a high-yield savings account from an online bank or credit union, many of which offer interest rates several times higher than the national average. There are many high-yield accounts on the market today with interest rates of 4% or higher. While still safe and generally accessible if you need to withdraw funds, these accounts can help your money grow at a rate that handily beats inflation and accumulates wealth.

Another option is to invest in low-risk, higher-return vehicles such as certificates of deposit (CDs), money market accounts, or treasury bonds. These options often require locking in your money for a period of time, but the returns can be significantly better than any savings account. For those with a longer time horizon, investing in a diversified portfolio of stocks and bonds through a robo-advisor or low-cost index fund can also offer higher returns.

Trap 2: Failing to leverage debt

Debt has a bad rap for good reasons, but when used strategically it can be a powerful wealth-builder. Many middle-class Americans try to avoid debt altogether, or mismanage it by accumulating high-interest debts like credit cards.

The key, Chan believes, is knowing the difference between good debt and bad debt.

Bad debt, such as credit cards with interest rates above 20%, can quickly spiral out of control, eating away at your income and savings. Good debt — like a low-interest mortgage — can be leveraged to build equity in an asset, such as real estate, that typically appreciates over time.

To beat the banks at their own game, start by paying off high-interest debt as quickly as possible. This frees up cash flow and reduces the amount of money lost to interest payments over time. Debt consolidation or refinancing also help you lower your interest rates and make debt more manageable.

For those with good credit, taking out debt strategically can accelerate wealth building. Consider using low-interest loans to invest in real estate, start a business, or fund other income-generating opportunities. It’s critical to understand your risk tolerance and find investments that stand the best chance of ensuring returns that exceed the cost of the debt.

Also consider making extra payments on your mortgage. By paying a little more each month, you can significantly reduce the total interest paid over the life of the loan, and pay off your property faster. This strategy saves money and increases your home equity more quickly, giving you greater financial flexibility.

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Chris Clark Freelance Contributor

Chris Clark is freelance contributor with MoneyWise, based in Kansas City, Mo. He has written for numerous publications and spent 18 years as a reporter and editor with The Associated Press.

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