Mercator Blog

For Most Consumers, Spending Is Better Than Saving
Date: November 11, 2014
Research Team

Despite exhortations to save, for most consumers, spending has a higher return than savings. In 2014’s low interest rate environment, the average savings account is a recipe for declining values, but incentives programs provide rewards on spending.

Looking at the most basic example, a Discover credit card offers 1% cash back on spending, with special offers that boost the reward for shopping at some merchants to 5%. According to, as of November 10, the national average annual percentage yield on money market accounts and savings accounts was 0.08%, and the average of accounts featured on its site was 0.39% APY. Yes, that is less than 1%.

The low return is not the only hurdle to these accounts. High opening amounts and minimum balances mean that even accounts paying 1% are out of reach for many average people. One account requires $25,000 to open. This raises the question, who has $25,000 to park in an area with such low returns?

Compare this to the increase in the Consumer Price Index over the past four years. In 2010, it increased 1.6%; in 2011, 3.2%; in 2012, 2.1%; and 2013, 1.5%. So, money in the bank had a declining value.

Now, since the most basic return mentioned above still does not keep up with inflation, it might make sense to try to layer more rewards on top of the spending. Let’s stick with the Discover card example, but add to it the funding of a Starbucks prepaid account. A Starbucks customer gets one free drink for joining the loyalty program and then then after 30 purchases, a free drink for each 12. Let’s look at the math:

      Cost of a cup of plain coffee: about $2
1 free coffee on every 12 purchases: $2 on $24, an ROI of about 8%
Add the 1% cash back on the original load, and now steady coffee drinkers get a 9% return on their spending.

Maybe a person is not a coffee drinker, but just about everyone goes to the grocery. Looking at a gas rewards program from Stop&Shop, shoppers earn 10 cents per gallon for every 100 points earned. The points can be accumulated over time, and every dollar spent means one point for shoppers. 

  This works out to a 10% yield. But the math gets a little more rewarding, because the points involve a transaction that also earns points.
First there is the 1% cash back on the $100 spent on groceries.
Then there is the 10 cents per gallon earned from every 100 points.
Then there is the 1% cash back on the purchase of the gasoline, and possibly more than 1% if a card is running a special promotion that offers additional rewards for shopping at a particular type of merchant.
This totals up to 12% return on the spending (1% for the initial purchase + 10% back in gas rewards + 1% on the purchase of gas with the credit card)—which is far better than a customer will get from any savings account available and better than many investment accounts. 

Along with that, there are no minimum balance requirements or transaction fees. All of this assumes that a cardholder pays off the card each month so that no interest charges accrue.

The counterargument is that shoppers are locked into the various merchants that provide the rewards, but it is worth noting that the shoppers are able to buy more coffee or gas with the points earned than they would with the money earned as interest on a savings account. The one risk is that in chasing points, shoppers spend more than they planned. While rewards programs have been developed to promote incremental spending, shoppers have become quite good at gaming the system for gas rewards and other types of perks.

While most banks and credit unions leave their depositors in this conundrum of spending being more profitable than saving, prepaid cards actually offer a better rate than some major banks. NetSpend offers a savings account with its premier card that pays 5% interest, and Mango Money offers a 6% APY savings account for all its cardholders. While there are some limits to the amounts that can earn these high interest rates, prepaid nonetheless offers a path to savings for some customers who would not find a better deal elsewhere.