When the Federal Reserve raised the target federal funds rate by another 0.75 percentage point this month, it opened up some new opportunities for savers to get better returns on their cash.
The Fed’s move aims to combat high inflation, which has pushed up housing, food and energy costs.
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The bad news for consumers is that if interest rates on credit cards and other deposits could rise, their debt will become more expensive.
But the good news is that savings yields will continue to rise.
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To date, the Federal Reserve has hiked rates a total of 3 percentage points this year, while signaling that it will raise them by at least one more percentage point by the end of the year, according to Greg McBride, chief financial analyst at Bankrate.com.
Depending on the course of inflation, further interest rate hikes could be pending in 2023.
Now is a good time to rethink where you put your savings, McBride said.
“Interest rates are rising at their fastest rate in 40 years,” McBride said. “Even if you’ve never seen it, now is the time.”
Online Savings Accounts
The September rate hike is already boosting some online savings accounts.
Some interest rates are already at 3% after starting the year at 0.55% and are expected to rise further, according to McBride.
“We’re at a level that we haven’t seen since 2009,” he said.
Notably, while interest rate growth has been concentrated in online accounts, brick-and-mortar savings haven’t moved much at all.
According to Ken Tumin, senior industry analyst at LendingTree, among online savings accounts, larger providers tend to lag behind Fed actions, while smaller providers tend to be more aggressive to hit 3%.
Credit unions, which also offer savings accounts, have also been more aggressive in keeping pace with central bank rate hikes.
Financial institutions paying a 3% rate include Dollar Savings Direct and Quorum, according to McBride.
Others that have already raised rates include Merchants Bank of Indiana and certain accounts at Elements Financial, an Indiana-based credit union, according to Tumin.
Certificates of Deposit
Meanwhile, certificates of deposit allow you to lock in an interest rate for a fixed period of time, which can vary from six months to five years, ending on what is called the Maturity Date.
Yields on these products also increase to 3% across the maturity spectrum, McBride said.
“These 3% returns are the best we’ve seen in many years,” McBride said. “But they’re likely to go even higher, especially on the shorter maturities, the one-year and two-year CDs.”
The downside is that a CD rate that looks attractive now may not be so nice six months from now if the Fed keeps raising rates, Tumin said.
To have more flexibility, savers should look for CDs that come with reduced or no withdrawal penalties, which can allow them to move their money when more attractive yields become available elsewhere, Tumin said.
Some banks and credit unions offer add-on CDs where you invest a certain amount at a certain interest rate now and have the option to add more money later with the same rate of return.
The Navy Federal Credit Union, for example, has a 20-month CD with an add-on that requires a minimum deposit of $1,000, according to Tumin.
Series I Bonds
As inflation has reached historic highs, Series I bonds have become increasingly popular due to their ability to offset these higher costs.
Series I bonds currently offer a 9.62% interest rate, which experts say is hard to beat anywhere else. This rate is scheduled to reset in November based on the latest inflation data. The expectation is that it could be north of 6%, according to Tumin.
“If you buy in October, you get six months of that 9.62% and then another six months of probably just over 6%,” Tumin said.
But Series I bonds also have downsides. The money cannot be withdrawn in the first year, and if you withdraw before five years, you will lose three months’ interest.
“I-Bonds are certainly worth considering in certain circumstances, but they are not a substitute for an adequately funded emergency savings account,” McBride said.
When liquidity should be a priority
Surveys consistently show that creating an adequate emergency fund is a challenge for many savers, and skyrocketing prices have only made it more difficult for many people.
Unless you have an emergency fund of at least three to six months of expenses, liquidity should be your number one priority when it comes to saving cash, McBride said.
In that case, online savings accounts are usually the best choice, he said.
If you’re just starting out, the good news is a small goal, such as: B. $25 a week, which can add up over time if you save consistently.
The key is to pay yourself first, McBride said, even if you’re also paying off credit card debt.
“It’s not just the 3% you earn in the savings account,” McBride said. “It’s also a buffer between you and 18% credit card debt if unexpected expenses arise.”