As the Federal Reserve raises rates to combat rampant inflation, you might find yourself checking to see if your savings account interest rate is rising accordingly. After all, the idea is to make saving more attractive than spending to cool an overheated economy, isn’t it?
Yes, but: Historically, savings account interest rates have not risen at the same rate as the Fed rate, although they tend to fall when the Fed rate does.
Why is this important: As higher interest rates make it more expensive for Americans to pay off their mortgages, car loans and credit card bills, many will be in desperate need of a financial boost, especially as inflation is skyrocketing and even the basics are getting more expensive.
The details: The savings interest rate data shown above is from Bankrate’s investigation big US banks, and “big banks have a lot of pricing power,” says Greg McBride, chief financial analyst at Bankrate.
- “They rarely pay cash like savings accounts and checking accounts,” McBride adds.
The big picture: Banks are historically slow to raise the rates they pay on deposit accounts – after all, they don’t have to because they don’t have to compete very hard for people’s money.
- And as the country’s banks spent their annual Fed stress tests with flying colors last week – meaning they’re ready for a downturn – the debate is born on whether banks should hold more capital in reserve, which could make them more finicky.
Where is it : Even if the big banks aren’t rushing to raise interest rates, you can still find relatively good alternatives by shopping around.
- “Banks that are more eager for consumer deposits are paying much higher yields and are actively raising rates in this environment,” McBride said.
- Some high yield savings accounts, for example, are advertising rates above 1%. My account, through American Express Personal Savings, is at 0.9% and seems to be climbing every week.
- High-yield online accounts may offer better rates in part because they don’t have the overhead of brick-and-mortar banks.
- Certificates of deposit (CDs) track the Fed rate much more closely. But they are offered for a fixed term (eg 6 months, 12 months, etc.) and you will be penalized for early withdrawals, which means they’re not a great option for the money you might need in the short term.
- Over long enough timeframes, stocks blow traditional savings accounts out of the water, in terms of yield (especially if you reinvest your dividends). But markets sometimes fall — the S&P 500 is down about 20% year-to-date — so cash in a savings account will at the very least be sheltered from market declines.
- I Bonds — long-term government savings bonds whose interest rate partially adjusts to inflation — offer rates above 9% and are all the rage among some money experts right now. But there’s a limit on how many you can buy, and like CDs, there are penalties for early listening.
And after: Interest rates on savings are expected to continue to rise “in the coming months,” according to Kendall Little, personal finance editor at NextAdvisor.
- This is especially true for online-only banks, local banks, and credit unions, Little adds, who compete much more fiercely with each other for your dollars than the big banks.
The bottom line: It’s always difficult there for a saver. But remember that building wealth is a long-term process, and don’t forget about underutilized options like your employer’s (401)k match, if they offer one and you’re able to. ‘benefit. It’s just free money.