We may be buying our stocks over the Internet, bouncing our telephone calls off of satellites and paying for everything with plastic, but when it comes to saving our hard-earned cash, many of us still prefer the financial equivalent of stuffing it in the mattress.

Bankrate.com's semiannual survey of 10 major markets nationwide finds that yields on passbook accounts hover at a decade-low 1.67 percent. Statement savings accounts fare little better at 1.71 percent.

The best passbook rate in the survey came from Chicago at 2.03 percent, just ahead of an even 2 percent in Detroit. The lowest was a tie between Houston and Dallas at 1.51 percent.

The highest statement account interest rates among the major cities surveyed, 2.07 percent, were found in Chicago and Washington, D.C.; the lowest in Houston (1.44 percent), San Francisco (1.52 percent) and Detroit (1.53 percent).

To see how your financial institution fared in our survey, click here.

Decline of savings interest
The October 1999 averages mark the latest slip in the ongoing erosion of savings interest over the past 10 years. Savings rates began the decade at 5.2 percent, declined to 2.35 percent by mid-decade and fell below 2 percent for the first time earlier this year.

By all rights, such meager returns should have sent consumers fleeing to higher-yielding alternatives long ago. Bankrate.com research indicates that short-term CD yields are at their highest point in 14 months while long-term (5- to 7-year) CD yields are at their highest levels in nearly two years. Even relatively short-term six-month CDs, for instance, currently average 4.36 percent.

Need liquidity? Try money market accounts, which comfortably average over 2 percent today, or pick a high yield MMA or perhaps a Money Market Mutual Fund, because in both cases there are yields to be had of over 5 per cent.

The latest data from the Federal Deposit Insurance Corporation shows personal savings accounts virtually neck and neck with certificates of deposit as America's preferred savings vehicle. Based on FDIC first-quarter 1999 figures for commercial banks and savings and loans, savings accounts totaled $1.61 trillion, narrowly edging CDs at $1.59 trillion. Money market accounts ran a distant third at $913 million.

But the money markets are gaining as people see them more and more as a way to add earnings to liquidity.

Penny-wise, pound-foolish?
To get some perspective on the rate differentials, let's run the numbers on Joe Average. If Joe left his entire $20,000 savings in a passbook account earning 1.75 percent for 10 years, his interest earnings would be $3,500, for an end balance of $23,500. Even if he'd only put half of that into a 5 percent CD, he would still have nearly doubled his earnings, $6,750, for a balance of $26,750 at the end of the decade. Had he bought the $10,000 CD and dumped the rest into a money market account paying 3 percent, his nest egg would have grown by $8,000 to $28,000, an increase of $4,500 over what his savings account would have earned him.

For a nation driven to shopping the best deals on home mortgages, car loans and credit cards, is our lackadaisical attitude toward low-yielding savings a sign that we are penny-wise and pound-foolish?

Not necessarily.

"Savings accounts are not rate sensitive," says Bob McGoffin, a professor at the Graduate School of Banking at Louisiana State University. "People do not put money in a savings account for the interest rates; they put money in savings accounts because they want to separate their funds but they want to have daily access. Savings are nothing more than a place to set it aside. That's why the savings totals stay up no matter what the interest rates are."

Keith Leggett, a senior economist with the American Bankers Association, tends to agree.

"I think there are several reasons why savings accounts continue to remain popular," says Leggett. "No. 1, they are FDIC-insured, so the consumer doesn't have to worry about risk. Second, although savings accounts tend to pay low interest, they do provide the consumer with liquidity. That is an important asset when compared to CDs, where you have your money tied up for a specified period. That's another reason why savings accounts will remain attractive to consumers. People want to have a rainy-day fund that they can pull on in case of emergency, but they also know that it is liquid, they can access it, and it gives them some interest -- not great, but some."

Shelter in the storm
While the low interest rates on savings accounts may not be cause for celebration exactly, they do have their bright side: equally low inflation. Historically, savings interest tends to ride just above the rate of inflation.

"Over the last couple years, we've had a really benign inflationary environment," notes Leggett. "Inflation over the last year was running at 1.7 percent. What's really going to determine the interest rate is the inflation picture. If inflation picks up, we will see the interest on savings accounts also pick up."

Despite low rates of return for customers these days, the trusty savings account remains one of the banking industry's pillars, a relatively stable fund in an increasingly changing and unpredictable sea of assets.

"Bankers talk about the importance of core deposits, the money the bank views as money that will be in the institution for the long run," says Leggett. "They clearly make a lot of their decisions about liquidity and their ability to lend based upon the availability of core funds. It doesn't mean they don't use other sources of funds, but clearly they want that stable money because they know it's something they can count on day in and day out."

Slow growth ahead
While a bank passbook seems destined to become a 20^th century curio as new technologies replace it, the reliable savings account will likely remain a cornerstone of the industry.

Still, Leggett notes that ABA studies also show that Americans are becoming more aware of, and inclined toward, new savings options that may yield higher returns.

"Households have changed how they allocate their wealth among financial instruments. Bank deposits and savings accounts are stable but they haven't had a lot of growth in them; they are fairly slow-growth. What you're going to see is a lot of money is moving into mutual funds where households are willing to get more return by taking on more risk. Savings accounts today are more of a precautionary balance so you don't have to tap into your CD or 401(k)."

Jay MacDonald is a freelance writer based in Florida

Related information: More savings news Search the latest savings rates The basics: Savings Definitions: Banking terms

-- Posted: Oct. 29, 1999